The global aviation industry "catastrophe" under the new crown epidemic
11:29 14-08-2020 reading
From remote states in the central United States to the deserts of Australia, more than 16,000 civil airliners are parked at airports around the world. Some of their models have been permanently sealed and grounded, some of the airlines they serve have fallen, and the rest are still brewing tens of thousands of layoffs.
Before the outbreak, the civil aviation industry, which was affected by the downturn of the global economy, was already saving itself, promoting mergers and acquisitions and alliances, cutting costs and unprofitable routes, selling assets to enhance cash flow, and divesting non-core businesses such as tourism and catering.
The arrival of the epidemic disrupted all this. "Not all industries have solutions to the epidemic." Jean Paul Rodriguez, senior professor of transportation at Hofstra University in the United States, said in an interview with China News Weekly that no one knows that there is no end. How much impact the epidemic will eventually have on the entire aviation industry.
Since March 2020, at least five European and American airlines have filed for bankruptcy, including Virgin Australia, Australia’s second largest airline. The three flag carrier airlines of Africa and South America, Mauritius Airlines, South African Airlines and Colombia Airlines, also face the same crisis. Ryanair President O'Reilly stated bluntly: "There will be more failures in the future."
On March 9, the International Air Transport Association (IATA) predicted that the civil aviation industry would reduce revenue by $113 billion due to the epidemic. A month later, the forecast data became 314 billion US dollars. This means that the total revenue of the global civil aviation industry will drop by 55% year-on-year in 2020. The report also pointed out that if there is no global resumption in the third quarter, the data will further increase.
When "frequent passengers" no longer have aviation needs
The first time Rodriguez felt the catastrophe faced by the global aviation industry was in early March. This well-known transportation expert in New York was originally scheduled to fly to Europe in the first half of the year to participate in several international aviation industry academic conferences. However, after the outbreaks in Italy and Spain became severe, many American airlines reduced the operation of transatlantic routes. On March 11, US President Trump cut off a civil aviation passenger service between the United States and Europe with a paper ban.
At that time, many civil aviation operators did not realize the severity of the crisis. Based on the experience of the "911" incident in 2001 and the "V" rebound in the civil aviation industry after the SARS epidemic in 2003, most major airlines only announced a one-month suspension, while planning a "resumption of work" from April to summer. "Equity" Buffett is also continuing to buy and hold shares in the four major US airlines.
"However, the reality facing the aviation industry is whether you want to fly or not, but whether passengers have needs." Rodriguez told China News Weekly. In March, he had discovered the signs of a great recession in the civil aviation industry: at the same time that the airline company sent emails to notify the cancellation of flights, the organizers of international conferences also sent emails informing them that the conference would be held online.
Regardless of whether it is voluntary or forced, major industrial and commercial enterprises around the world have been supporting employees to work remotely since March, and meetings have been held online. Residents of European and American countries have been isolated at home. In April, Facebook and other European and American business giants stated that they would allow indefinite, life-long home office work for qualified employees.
These people used to be typical "frequent travelers", and their meetings and business trips were the basis for the survival of the civil aviation industry. Only 3% of the world’s 7.6 billion people fly regularly. In the UK, 15% of frequent travelers consume 70% of the flight market.
When telecommuting has become the norm in the post-epidemic era, the analysis of whether frequent passengers will return to the passenger plane has created conflicting situations. According to a survey by the University of California, Los Angeles, even if the self-isolation measures are cancelled, more than 60% of air passengers are “sure or likely” not to travel by air temporarily. According to the report of the Global Business Travel Association, most business travelers want to restart air travel within the next six months.
At least at the end of May, the global civil aviation industry has not shown signs of resumption of work on a large scale. The daily passenger capacity of the European and American civil aviation markets is only about 5% of the same period last year. In February, of the more than 29,000 civil airliners worldwide, 25,000 were in normal service. By March, there were only 13,000 passenger aircraft in operation, and more than 15,000 passenger aircraft were parked around the world. The number of parked passenger aircraft in April and May increased by several hundred compared with March.
Southwest Airlines executives predicted in an interview with the media that this situation even "may continue for several years," but the airlines have no sufficient funds. The parked passenger aircraft does not bring profits, but it needs regular maintenance, maintenance, and cleaning. It also needs to start the engine, test system, and clean the ventilation at regular intervals to ensure the status of the aircraft.
These fees are called "quasi-fixed expenses." For an airline, its fixed expenses such as debt, depreciation and other expenses, and quasi-fixed expenses such as parking and maintenance expenses, administrative expenses, and employee salaries account for 49% of the total expenses. The other half are the irregular expenses brought by aircraft operations. .
According to IATA estimates, the global civil aviation industry's total revenue in the second quarter of 2020 was approximately US$67 billion, a 68% year-on-year decrease. Because less than 10% of flights are in operation, the global civil aviation industry has reduced its fixed expenses by 70%; but even with large-scale layoffs, quasi-fixed expenses have been reduced by only 33%, and the total quasi-fixed expenses and fixed expenses amounted to US$63 billion .
A year ago, after deducting taxes and expenses, the global civil aviation industry still achieved a profit of US$7 billion in the second quarter. But in the second quarter of this year, the civil aviation industry faced a loss of $39 billion. Because the airline’s book funds also include $35 billion in unrefunded passenger airfare, IATA comprehensive calculations show that the global civil aviation cash flow decreased by $61 billion in the second quarter of 2020 alone, which is equivalent to the industry’s total revenue last year. One tenth.
When the data is transferred to specific companies, even the largest airlines in Europe and the United States cannot support it. Southwest Airlines, which has been profitable for 40 consecutive years, currently has a net daily loss of about US$30 million. American Airlines, which has more debt, "plans to reduce its daily loss to US$50 million next month." On April 4, Bastian, president of Delta Air Lines, said in an email to employees that the airline would burn more than $60 million a day.
Citibank estimates that for the three largest European aviation groups, IAG (British Airways Parent Company), KLM Group and Lufthansa, the three-month suspension of production will increase their net debt ratio to 3.5 times, 7.7 times and 12.4 times.
Open from salvation
Faced with the dilemma, airlines have laid off employees and reduced their fleets. IAG Group alone planned to lay off 12,000 people, accounting for a quarter of the total number of employees. But this can only "throttle", not "open source", and cannot further reduce quasi-fixed expenses. Only by letting the airliner "move up" can it reduce the losses caused by the parking.
"Customer to goods" is currently the only way. Driven by the epidemic, the global air cargo volume increased by 4.8% in the first quarter of this year, but due to the large-scale suspension of civil aviation passenger aircraft, passenger cargo compartments could not be used, and the industry’s available cargo tonnage (ACTKs) decreased by 22.7% year-on-year, which also made air cargo Price increased. Therefore, some airlines choose to remove the large wide-body passenger aircraft from the cabin seat and fly to a cargo flight.
Among the mainstream international airlines, United has opened a "passenger-to-cargo" flight on March 28, using Boeing 777 and Boeing 787 airliners to transport supplies between China and the United States. In April, Air Canada transported masks between China and Canada on Boeing 777 airliners with economy class seats removed. In the same period, Lufthansa used the Airbus A330 airliner to run a "passenger-to-cargo" route, and its technology company has also begun to carry out a "passenger-to-cargo" transformation of the A380.
However, "customer to goods" also faces some practical challenges. Even if the cabin seat is removed, because the load-bearing capacity of the cabin floor is limited, and all cargo needs to be moved in and out through the narrow cabin door, the seemingly large wide-body passenger aircraft cannot actually load the same weight as the cargo aircraft of the same class.
Currently, Lufthansa operates up to 49 "passenger-to-cargo" flights converted from large wide-body passenger aircraft every week, and each flight can carry an average of 30 tons of cargo. The world's largest full cargo aircraft has a loading capacity of 250 tons, and the generally used large full cargo aircraft has a loading capacity of about 100 tons.
In addition, "customer to goods" also requires a higher time cost. It took two weeks for Lufthansa’s A330 aircraft to remove seats and modify cabins. The "passenger-to-goods" proposal proposed by some intermediate service providers took more than a month to complete.
Another "open source" way is to hit your own aircraft. Reuters pointed out that whether the airline company can survive the cold winter, "a great deal depends on the assets planned to be sold." In addition to the loan as a guarantee for the aircraft, mainstream airlines such as United Airlines and Southwest Airlines have begun to negotiate sales and leasebacks. The assets involved are more than 20 passenger aircraft.
Sale and leaseback, that is, the airline sells its own passenger aircraft, and then continues to actually operate these passenger aircraft by lease, this method can quickly return funds and fill the gap. Take Southwest Airlines' sale-and-leaseback program as an example. The sale of 20 Boeing 737 and 737MAX passenger aircraft can make a profit of US$800 million, while the rent is about US$300,000 per aircraft per month.
American Airlines analyst John Strickerland speculates that many airlines will also "combine business models and try different things." At present, factories owned by Delta Airlines and other aviation companies have begun to switch to masks. But Rodriguez emphasized that past history proves that airlines can focus on their main business to avoid falling into deeper crises.
Previously, British Monarch Airlines and Thomas Cook Airlines went bankrupt in 2017 and 2019, respectively, both related to the close ties between airlines and tourism groups. Against the backdrop of the economic downturn, the recession in the tourism industry has dragged down to become a vassal airline. Even in the current situation, aviation industry believes that the divestiture of non-main business has always been the direction of aviation industry reform, and will not change because of the new crown epidemic.
At the beginning of the outbreak, Reuters quoted analysts as saying that the outbreak will push the fragmented European aviation market to an American-style merger, eventually forming a situation where three or five airlines occupy the majority of market share. However, in the context of the crisis of the three major European aviation groups, large-scale layoffs and reduction of the fleet, the smaller European airlines not only were not acquired by the large groups, but began to return to the state.
The Italian government announced this month that in order to save Alitalia, it has decided to inject 3 billion euros to nationalize it, which is equivalent to half of the government assistance the airline has received in the past decade. Earlier, the German government also proposed to acquire a 25% stake in Lufthansa Group in exchange for financial assistance in exchange for a controlling stake.
The US government has issued $25 billion in salary subsidies and huge loans for each of the ten major airlines, but the airlines that are funded must guarantee a certain flight execution rate, even if there are no passengers.
But Lufthansa President Karl Stern Spel reacted fiercely to this "open source" approach, saying he would rather file for bankruptcy than accept the government's decision-making power. Its concerns are not without reason. The Italian government has asked Alitalia to reduce its fleet by nearly one-fifth after receiving government investment and replace its affiliated airline alliance. Reuters also reported that the German government may prevent Lufthansa’s planned layoffs of tens of thousands of people after holding Lufthansa.
There are also voices who are positive about government intervention. An environmental organization pointed out that the government can take this opportunity to put forward additional energy-saving and emission-reduction requirements for the development of airlines to promote the achievement of carbon emission targets. Dan Rutherford, director of aviation affairs at the International Clean Transportation Council, said that if the government wants to respond to the dual challenges of the new crown epidemic and climate change, now is the opportunity.
One day in late April, Matthew suddenly received an email from his mentor: his research project was suspended and there is no possibility of restarting it in the short term. Matthew from the United States is a doctoral student funded by British aeroengine giant Rolls-Royce (Rollo). For the past two years, he has been involved in the development of electric motors for the electric passenger aircraft project jointly undertaken by Rolls-Royce and Airbus.
"I never imagined that the impact of the civil aviation industry would spread to us so quickly, and even change the speed of human technological progress." Matthew expressed emotion with "China News Weekly". All of this stems from the civil aviation industry's rethinking of the needs of passenger aircraft in the post-epidemic era.
Since March, major airlines around the world have been adjusting their operating models on a large scale. The reforms are aimed at old models and large wide-body passenger aircraft. American Airlines alone announced the retirement and storage of 6 aircraft, totaling 137 passenger aircraft.
Old passenger aircraft have poor economy and high maintenance requirements, and have been the object of gradual elimination by airlines. But on the other hand, airlines have also grounded, resold, and retired large, wide-body passenger aircraft that are not old. Delta Air Lines even directly sealed the 18 Boeing 777s that were just converted in February this year.
Compared with the narrow-body aircraft carrying about 200 passengers, the large-scale wide-body aircraft can carry up to three or five hundred passengers, with a longer voyage and a better passenger experience. As to why large-scale wide-body aircraft will be quickly eliminated due to the epidemic, some experts pointed out that this is related to the current law of global resumption of work.
Due to the resumption of trade unions first in the country and within the region, the global blockade is lifted indefinitely, and the passenger demand for international routes operated by wide-body aircraft will remain low for a long time. The IATA analysis report predicts that the demand for long-distance air travel by international passengers will only return to the state of 2012 and 2013 by 2025, which is the lowest level of long-distance air travel demand in the past decade.
Therefore, in the next five to ten years, the existing wide-body aircraft will be parked for a long period of time, resulting in high costs and cannot make profits for the airline company. Contrary to this, short-haul routes operated by narrow-body aircraft and smaller regional passenger aircraft that have been gradually restored have become the focus of airline revenue.
Against the backdrop of large losses for all major airlines in the United States, Tianxi Airlines, which has 484 regional airliners and specializes in serving regional flights for major airlines, released its first-quarter financial report in May. Although the revenue dropped significantly, the company’s "Small planes" actually achieved a profit of more than 30 million US dollars.
In terms of operating unit costs of passenger aircraft in the era of epidemics, wide-body aircraft are also the least cost-effective. After resuming work, the airline company must reserve spaced "safe seat space" for passengers, which makes the available seats of the airliner account for only about 60% of the total number of seats. American Frontier Airlines once asked passengers to pay for empty seats, which was corrected after being criticized by public opinion and the government. Other airlines have chosen to bear the resulting increase in costs themselves, or incorporate the increased costs into the fare in disguise.
IATA Director General Juniak believes that if this policy continues for a long time, it will definitely change the way the aviation industry operates. According to IATA estimates, ensuring "safe seat space" will increase the operating cost of each ticket available for narrow-body aircraft by 50%, wide-body aircraft by 67%, and regional passenger aircraft costs by more than 100%. The operating cost of each seat of wide-body aircraft is much higher than that of narrow-body aircraft and regional passenger aircraft.
For example, a standard 168-seat narrow-body Airbus A320 airliner originally had an operating cost of US$86 per seat, which rose to US$129 under current special initiatives; and a standard 373-seat wide-body aircraft The Boeing 777 airliner originally cost US$202 per seat, up to US$337 after an increase of 67%.
In this context, the Airbus A3 with the largest model and the highest operating cost