Aviation's darkest hour

Airlines, airports, and aircraft makers are under siege. How will they emerge, and what lies ahead in the future of flying?

IN April last year, Changi Airport saw 5.58 million passengers breeze through its doors. This April, passenger traffic slumped by a staggering 99.5 per cent as airlines cancelled flights and grounded planes, turning the airport into a ghost town. A similar scenario has been playing across airports worldwide after countries slammed their borders shut in a desperate bid to contain the Covid-19 pandemic, obliterating travel demand and thrusting the global aviation industry into an unprecedented crisis.

With travel at a virtual standstill, Changi Airport has consolidated its terminal operations into Terminals 1 and 3, and suspended operations at Terminals 2 and 4 to save on running costs. Operations at T2 will be halted for 18 months amid expectations of a slow recovery, allowing for expansion works at the terminal to be fast-tracked.

Singapore Airlines (SIA) hasn't been spared either, as the flag carrier slashed 96 per cent of its network capacity and grounded the majority of its fleet, prompting it to start parking some of its aircraft for long-term storage in Australia. Weighed down by the impact of the virus and by hedging losses, SIA posted its first annual loss ever, sinking into the red to the tune of S$212 million for the 12 months ended March 31, from a net profit of S$683 million a year ago.

To stay afloat and save jobs, it is raising S$8.8 billion through a rights issue of shares and mandatory convertible bonds (MCBs), but has secured shareholders' blessings to raise a further S$6.2 billion in MCBs in the coming months if necessary.

Majority shareholder Temasek threw the national carrier a critical lifeline by underwriting the fund-raising exercise. Nonetheless, to rein in costs, the airline's senior management has been taking pay cuts, while pilots, executives and associates are on varying days of compulsory no-pay leave. Certain staff - such as cabin crew - are being offered voluntary no-pay leave.

Other airlines are planning job cuts, such as British Airways, which is expected to shed some 12,000 jobs, while Air Canada could reportedly slash 20,000 jobs. Meanwhile, UK-based plane engine maker Rolls-Royce has said it will cut headcount by 9,000, or 17 per cent, as airlines dial back on maintenance work for aircraft and shelve plans to take delivery of new planes. It is also reportedly undertaking a review of its plants, which are in England, Singapore and Germany. Aircraft makers Airbus and Boeing too are planning job cuts, having already shrunk production.

Their darkest hour

To say the picture isn't a pretty one is an understatement.

The International Air Transport Association (Iata) projects that passenger revenues for the world's airlines will slump by US$314 billion this year, or 55 per cent from 2019. These estimates are based on the assumption that severe travel restrictions remain in place for three months, with a progressive easing of restrictions to take place in domestic markets starting Q2, followed by regional and intercontinental markets.

This comes as global passenger traffic had plunged 80 per cent by early April, vis-a-vis at the start of 2020 as border closures paralysed airline operations.

Of the different regions, Asia Pacific's carriers will bear the brunt of those multi-billion-dollar losses, with revenue expected to plunge by US$113 billion and passenger demand to halve. By Iata's calculations, Singapore is expected to see a 48 per cent dive in passenger demand this year vis-a-vis 2019, which will result in revenue losses of US$6.73 billion and threaten 169,000 jobs.

In the second quarter, airlines worldwide will rack up a cash burn rate of US$61 billion, projects Iata, which is urging governments to save the industry through measures such as direct financial support, loans, loan guarantees, and tax relief.

While countries such as Australia, New Zealand Singapore have rolled out a sizeable package of measures to support their aviation industry, others, such as Thailand, had yet to do so (at the time of writing).

Outside of Asia, American and European carriers too have been scrambling to secure funds. Air France-KLM reportedly is garnering 7 billion euros (S$10.86 billion) in loans from the French government, while the Dutch government has pledged a further 2-4 billion euros. Meanwhile, Delta Air Lines is receiving billions in loans and grants as part of a bailout.

"We need the money, now, now, now."

High on the agenda for Iata are two things, its director-general Alexandre de Juniac tells The Business Times in a recent interview. "Firstly, the implementation of financial packages by states. We need the money, now, now, now. It's urgent!"

Citing a fairly positive response from governments in terms of state aid thus far, Mr de Juniac emphasises that time is of the essence. All in, Iata estimates that the global airline industry will need some US$200 billion in government support to ride out the crisis.

"We need these plans to be effectively implemented. We need the money to flow in our balance sheet and P&L. We are struggling to survive," asserts Mr de Juniac, who was chief executive of Air France-KLM prior to taking the top job at Iata. "There are many airlines that are fragile, and their survival will depend on financial support."

If the financial support fails to materialise, "half of the airlines will run out of cash in June, and more in July".

Second on his to-do list is implementing a collaborative plan between nations - one that is both effective and safe - that allows airlines to restart operations as governments progressively re-open borders.

Airlines' day of reckoning as industry reshapes

"Air Mauritius, Colombia-based Avianca, South Africa-based Comair and Virgin Australia are the first of potentially dozens of major airline bankruptcies due to Covid-19," reckons Brendan Sobie, independent analyst at Sobie Aviation.

At the same time, there are smaller regional operators which have already gone into voluntary administration or are restructuring. Meanwhile, Thailand's loss-making flag carrier, Thai Airways International, is undergoing a "reform plan" via a court-led reorganisation as the debt-laden airline reels from the impact of the pandemic.

While not all airlines that enter administration or file for bankruptcy will survive, for some carriers the administration process could facilitate an overdue restructuring and allow them to re-emerge under new ownership, Mr Sobie says.

With its home base Down Under, for instance, Virgin Australia has piqued the interest of a number of investors. "Unlike many others, Australia remains an attractive market to airline industry investors, and the business case for a re-launched Virgin Australia or a new airline to fill the void is strong," he says. "A smaller all-narrowbody, mainly domestic airline will emerge and should be profitable within a few years, or maybe sooner, given the strength and potential rapid recovery of Australia's domestic market."

Ultimately, the number of airline bankruptcies will hinge on the number of countries that provide financial support, says Mr Sobie. "Several countries have so far been reluctant to make commitments and have not yet heeded warnings from their airlines and industry associations that financial support is critical to avoid mass bankruptcies."

While some of the more financially sound carriers have either already lined up or are in the process of securing government financial aid, there are still many others - already struggling pre Covid-19 - that are facing the uphill task of convincing their governments to stump up funds.

"This could put many airlines in a precarious position in the weeks ahead and widen the gap between the haves and have-nots," says Mr Sobie. "Not all governments and government-linked investment companies may be willing to provide support. The resulting list of governments that elect to support aviation and those that neglect aviation will play a huge role in shaping what this industry looks like post-crisis, with massive long-term ramifications.

"Singapore is a good example as Singapore and SIA are now in a great position to potentially take advantage of any consolidation in the industry - airline consolidation and hub consolidation."

At the same time, some weaker airlines that were at risk of collapse even before the pandemic hit might ironically stand a better shot at a new lease of life, he points out, since a government bailout is more likely to materialise in times of crisis.

Mr Sobie adds: "The aviation market is not likely to fully recover for two to three years so this will be an evolving story. There could be another spate of bankruptcies in 2021 or even 2022, but right now the focus is on airlines that need to bolster liquidity urgently to get through this unprecedented period of virtually no flying."

Airlines that go belly up would have a knock on effect on other businesses, since every airline job supports another 24 in the travel and tourism value chain, Iata projects. According to the global airline association, 11.2 million jobs in the Asia Pacific alone are at risk, if those which rely on the aviation industry are included.

Not yet cleared for take-off

Iata expects that the beginnings of an upturn in demand could begin in the second quarter for domestic markets, while international markets might only see travel demand return in the fourth quarter as governments are likely to keep border restrictions in place longer. In Asia, the recovery is being led by Northeast Asia as markets such as China and Hong Kong add capacity.

According to Bloomberg, which cited data from OAG Aviation Worldwide, airlines added a net 600,000 seats last week, 2 per cent more than the week before. However, at nearly 30 million seats weekly, global capacity is still a mere fraction of the 110 million seats a year ago.

In a press release earlier this month, Iata said that it supports passengers and crew wearing face coverings and masks respectively onboard aircraft as "a critical part of a layered approach to biosecurity" as travel returns, highlighting that evidence thus far suggests the risk of transmission onboard aircraft is low.

Aside from limited face-to-face interactions given that passengers are seated face forward, high efficiency particulate air (HEPA) filters onboard modern aircraft help to purify cabin air to quality akin to a hospital operating theatre.

Other recommendations as part of a holistic suite of measures include temperature screening of passengers; boarding and deplaning procedures which minimise contact with other passengers and crew; more frequent and enhanced cabin cleaning; limited movement within the cabin in-flight as well as simpler meals to reduce interaction.

While some airlines have been implementing "social distancing" measures on flights - such as leaving the middle seat empty - the global airline association opposes the move, saying the higher costs would either spell the end of affordable travel as fares spike, or force airlines to go bust if they do not pass on the costs to passengers.

By "removing" seats, the maximum load factor will slide to 62 per cent - well under the average industry breakeven load factor of 77 per cent. Out of a sample of 122 airlines, only four of them could break even at load factors below 62 per cent.

Air fares would have to increase in order for airlines to break even and air fares in the Asia Pacific alone would go up by 54 per cent year-on-year, Iata estimates.

Iata also points out that the average seat width spans less than 50 centimetres, compared to the recommended one to two metres of separation that most authorities recommend for social distancing.

"When proven and available at scale, testing for Covid-19 or immunity passports could also be included as temporary biosecurity measures," Iata says.

The Civil Aviation Authority of Singapore now requires passengers onboard Singapore carriers to wear a face mask throughout the flight and to observe safe distancing measures when boarding or using the toilet onboard. Passengers on flights to Singapore will have to undergo a basic health assessment, which includes a verbal health declaration and temperature screening.

On SIA, meal service has been suspended for flights within South-east Asia and to China; instead a snack bag and water are provided upon boarding. However, meals are available on other flights. Meanwhile, cabin crew and pilots have to wear masks as well as goggles or eye visors during the flight.

As the pandemic spread in recent months, Changi Airport stepped up cleaning efforts and precautionary measures, including introducing more hand sanitisers across the airport; boosting the frequency of cleaning and disinfecting of high contact areas such as toilets and handrails; disinfecting floors and cleaning of carpets; and temperature screening of both passengers and staff.

"We will continue with our measures to safeguard airport workers, passengers and visitors," said a spokesperson for airport operator Changi Airport Group (CAG) in response to queries.

"As the situation evolves, there will be new industry norms and regulatory guidelines to be put in place for the safety and health of the travelling public, but it is too early to say definitively what these will be," the CAG spokesperson went on to say, adding that it is engaging stakeholders across the industry.

What's clear is that anyone hoping to travel in the near future can expect terminally long queues at airports everywhere, as safe-distancing measures and checks are kept in place.

Safety aside, there may also be other challenges around re-starting global airline operations. After months of being grounded, aircraft will no doubt require maintenance.

Licensed personnel - such as pilots - may have expired licences, or an airline may have missed its safety audit dates. Already, aviation regulators are implementing initiatives to maintain operational capabilities, such as extending the validity of certificates and licences.

Re-opening the aviation industry, an unprecedented event in itself, will not be as simple as ramping up operations once the green light is given. This is another aspect that Iata is working on, together with governments and key industry stakeholders, for a harmonised and co-ordinated approach, highlights Mr de Juniac.

A long journey ahead as travel patterns change

The road to recovery will be a slow, arduous one, market watchers say, with Iata estimating it could take until 2024 before demand for international travel returns to pre-crisis levels.

Domestic markets will be the first to start their recovery process in the coming months - albeit gradually - though some could climb back to pre-crisis levels by year-end, reckons Mr Sobie.

"For the international market, the recovery will be even slower and more gradual. We could see select country pairs start to recover in the second half of this year if bubbles between certain countries are established."

Australia and New Zealand, for instance, are working on allowing travel between the two countries, which will give their tourism and aviation sectors a much needed lift. In Europe, Baltic countries Estonia, Latvia and Lithuania are opening their borders to each other. Meanwhile, China and South Korea are implementing a "travel corridor" between certain cities in the two countries to allow for passenger flows.

Here in Singapore, the government is exploring piloting green lane - or fast track - arrangements with select nations seen as at equivalent or lower risk of community transmission as Singapore. This would be for essential travel and in limited numbers, complete with the necessary precautions.

Mr Sobie adds: "For the overall international market, the start of the recovery hinges on border restrictions being lifted universally and for demand to return in what is a recessionary environment and one where people may not yet be comfortable about travelling again."

An Iata-commissioned survey of travellers released in April shows that six in ten plan a return to travel within one to two months of the pandemic being contained, but the remaining 40 per cent say that they could wait six months or more, indicating lingering fears. Nearly 70 per cent of those polled say that they could postpone travel until their financial situation stabilises.

Even as borders are lifted, corporate travel may also take a hit as the last few months have shown companies that virtual meetings and phone calls are viable alternatives to business trips. Corporate travellers may also be reluctant to attend crowded events such as conferences and trade shows, which suggests prolonged pain for the meetings, incentives, conferences and exhibitions (MICE) segment, Mr de Juniac points out.

One thing's for sure. As the headwinds slowly subside and as airlines start to take to the skies again, the aviation industry will look very different from what it was before the pandemic hit.

READ MORE: At the airport, expect plexiglass, face masks and long queues

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