By James Geldenhuys; Head of Aircraft Finance: Nedbank CIB
The widespread lockdown response to Covid-19 has meant that the vast majority of aircraft of all shapes and sizes have effectively been grounded. But while the immediate impact of operational shutdowns has been felt by every airline in the world, the long-term repercussions of the pandemic is likely to be experienced very differently by public and private aviation organisations. And the extent and duration of that impact will depend on a number of factors – some of which have to do with internal controls, management actions and strategies, but most of which are largely out of the control of the individual airlines themselves.
The two most obvious of these factors that will influence airlines and the speed with which they are eventually able to fully restore their operations after Covid-19 are the health of their balance sheets, particularly in terms of their cash position, going into the lockdown, as well as the location or jurisdiction in which the airline exists and the routes on which it operates. For instance, the post-pandemic recovery is likely to happen relatively quickly for domestic flights and, potentially, even for continental routes. However, the international recovery could take a fair amount longer as it will be largely dependent on global destinations reopening their borders, and crucially a desire and willingness by tourists to enter specific countries.
Then, the diversity and estimated flexibility of an airline’s fleet will also be a significant determinant of its ability to recover, and the rate at which such recovery occurs. A fleet that includes smaller gauge aircraft will almost certainly be in a better position to get back in the air, at least to a certain extent, post Coronavirus. The likely low initial demand makes flying smaller gauge aircraft, with low passenger numbers, significantly more viable than trying to maintain profitability with large, very costly, but relatively empty planes.
The nature and effectiveness of the responses to Covid-19 by the governments of countries will also have a significant influence on the extent to which the virus negatively impacts aviation in those countries, and the length of time for which those impacts will be felt. Governments obviously have a very delicate balancing act on their hands at the moment; one which some commentators have alluded to as the ultimate test of democracy. On the one hand, restricting people’s movements has been key to achieving the flatter infection curve that has been so widely touted as imperative in order to ensure that healthcare systems can cope. But on the other hand, there is a limit to which people will accept such restriction before it starts to influence their voting decisions in future elections. Ultimately, a government that reacted quickly to stem the infection tide, and then manages to get this balance of protection and personal freedom right, is the one that will likely have the biggest positive impact on the future of aviation companies in its country.
A further deciding factor in terms of the Covid-19 impact on airlines relates to the extent to which shareholders and management have been actively involved in managing the situation from the start, and remain actively involved in ensuring a relatively smooth transition back to sustainable and economically viable operations. If leadership has been largely unresponsive to the virus impacts thus far, it is unlikely that they have any intention of applying their minds to recovery strategies post-Covid-19. In the meantime, the airlines that are at the mercy of such disinterested leadership are essentially burning truck-loads of cash every day because even a grounded fleet needs to be maintained, usually at significant fixed costs. And even shareholders and managers that are actively involved in helping their airline navigate its way through the pandemic currently will be of little help to their airlines if they are not already thinking and planning well beyond the immediate challenges and developing workable strategies for quick recovery in the future.
Ultimately, like most questions relating to life and business after Covid-19, the future of airlines is largely unknown and almost impossible to predict. For now, the airlines with significant amounts of cash on their books stand the best chance of minimising the damage and restarting their businesses down the line. And while this pandemic will almost certainly change the way many airlines operate, the changes are unlikely to be huge. As long as there is demand for flight travel after Covid-19, which there most definitely will be, there will be airlines with the solutions needed to meet that demand.
Until then, it’s really a question of which airlines already had the systems in place to effectively weather this level of economic turbulence. And whether they have the foresight to identify and act on the many opportunities that are bound to arise as the world returns to a semblance of normality.
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