What might Covid-19 really mean going forward?
24th March 2020
Another day, another set of restrictions on air services and announcements from airlines over grounded aircraft. Use of the word ‘unprecedented’ is not unwarranted. Only two months ago the industry was looking at the patterns of demand and bounce-back arising from previous disease outbreaks, including SARS (2003), Avian Flu (2005 & 2013) and MERS Flu (2015) as a likely outcome. On the 20th February, IATA presented data illustrating the impact on aviation from each of these events, showing, presumably with a level of optimism, the rate at which the industry recovered. It is increasingly clear that this data provides no real guidance on the global impact of Covid-19 and we are in uncharted territory.
A number of things are different this time around, but key to all of these is the rapid global spread of the virus in a way never seen before in living history, driven partly by the higher propensity to travel of those in Europe and North America than in other parts of the world. Perhaps the key difference between previous outbreaks and the situation today is that the downturn in aviation is no longer driven just by fear of travel, or even the restrictions imposed by some governments on travel, both of which historically eased and led to the rapid bounce-backs in demand, but rather the significant global economic shock which will inevitably result from the economic ‘lock-down’. It seems increasingly likely that the economic repercussions will be greater than the economic downturn in 2008/09, despite the best efforts of governments around the world to support their economies.
For aviation, with its strong correlation to economic drivers such as GDP, this is clearly bad news and the parking of aircraft currently hides the inevitable truth that some of these airlines and aircraft may not return to the skies. Even the fall of oil prices to $25 per barrel is unlikely to provide sufficient stimulus when the industry is able to mobilise again. It is likely that, for the near future at least, airline fleets will be reduced in size. This may mean that we have seen the end of regular service by the Airbus A380 with several key operators for example and other reductions in capacity. The airlines are, as best they can in these uncertain times, clearly preparing to match capacity to lower demand going forward.
This poses a dilemma for a number of stakeholders in aviation, which has been seen globally by many as driving a virtuous circle whereby air services create connectivity that, in turn, improves the economic performance drives forward further growth symbiotically. This is evident in announcements, at least by the UK Government, that it wants to ensure that the aviation sector is ready to go again in the aftermath of the crisis so as to help drive the global economic recovery. Unfortunately, to date, this has not been manifested with tangible sector specific support.
Whatever support is put in place in the coming weeks, it is inevitable that, with fewer aircraft, many airports will lose routes in the medium to long term. Airlines will be focusing their return to the skies on the biggest economic centres with the highest yields, to the detriment of weaker regional economies around the world. This simple fact means that airports, regional economic stakeholders and governments need to consider their strategies now to ensure they do not miss out entirely when the recovery comes.
Key to this will be making a credible case for supporting the airlines and airports in the first place, so that they are able to deliver vital connectivity again when the crisis comes to an end. A few airlines were originally taking a stance that they do not endorse government support, presumably because they saw the opportunity for short-term benefits from reduced competition as their weaker compatriots fall away. This stance could be short-sighted, though, because these larger airlines are precisely the carriers who have deserted point to point flying from the regions to focus on their core hubs. If governments fail to support airlines that can drive regional economic growth, this will damage economic recovery overall and, in turn, damage the prospects of these national carriers and the hubs that they serve. Hence, where possible, making the case for regional or national intervention is critical.
As we move forward though, it will be airports and their regional stakeholders who will need to pitch themselves against each other to secure their share of capacity. The quality of the case made will be important and is likely to cover not only a credible and competitive commercial offer, but will also need to convince airlines that the regional economy has what it takes to justify their commitment to a route or airport. Strange as it may seem, stakeholders that plan now for their trajectory to recovery are more likely to be successful in the new competitive landscape.
Finally, it is worth considering how airports need to continue planning for their futures. The global importance of air travel means that we will see a bounce-back, we will see a return to growth. Typical airport planning and delivery timeframes mean that we must continue to plan for that growth; plan for the infrastructure that will be needed; and take this opportunity to seek to secure the right to grow through the planning system. The recent growth of air travel saw real pressure on the infrastructure at many airports often leaving insufficient time to plan properly. Those airports should see this not as a time to take their foot off the pedal, but rather as the breathing space they need to properly plan their strategic growth before that pressure returns.