AviationAirline profits have melted like ‘snow in the Sahara’

Why flying will not be the same again

Will this be the new normal for airlines passengers, as seen at Kuala Lumpur International Airport?
Will this be the new normal for airlines passengers, as seen at Kuala Lumpur International Airport? Photo Credit: SITA

SYDNEY - Aviation veteran Christoph Mueller has paid tribute to airline executives for the amazing job they have done, building up networks that allowed people to fly everywhere, earning dividends for investors and shareholders and paying bonuses to staff for the past 25 years.  

“To see it all melting away like snow in the Sahara is a personal tragedy,” said the airline executive, also dubbed as “crisis CEO” for the roles he’s held with numerous airlines such as Malaysia Airlines and Aer Lingus. Most recently, he was chief digital and innovation officer of Emirates.

Mr Mueller was speaking at the CAPA Masterclass last evening, in which chairman emeritus Peter Harbison predicted that it would be a long road back for the airline industry, and that it won’t be the same for at least five years.

Firstly, there will be fewer airlines. Yes, some will be saved by governments and that’s not a bad thing, said Mr Mueller. He said, post-911, the European perspective was that Chapter 11 was seen as a competitive advantage for US airlines because it allowed for an orderly process for the carriers to get back in shape.

“If state aid can be used as a proxy to simulate a Chapter 11 situation over the next few years to restructure airlines, I have a positive sentiment about that for the first time.”

Yes, there may be fears that governments, in having bailed out airlines, could become more protectionist but Mr Mueller argued that if it’s managed in a way that’s temporary or be similarly structured like private equity or a sovereign wealth fund, the rules of the game could remain the same – that is, governments keep arm’s length.

“I do not know of a single airline CEO who would want a government bailout, they have worked in a highly privatized environment for a long while.”

Secondly, just as 911 changed the rules of security screening for airlines and airports, Covid-19 will change health screenings. Mueller said it was vital that an internationally-recognised body come up with guidelines that can be used by all airlines and airports.

“After 911, we saw a huge surge in security screenings which, 19 years after, are still the same. Airlines will take a hit if medical screening is introduced. There needs to be an international institution that steps in so that not every country is coming up with their own screening procedures.

“Somebody needs to draw up the rules of the game – you can’t have one airline saying four abreast is good social distancing, and another saying six abreast. It will be a total mess.”

Saying he does a lot of mystery shopping these days, he said it was now impossible, if you wanted to fly back from Asia to Europe, to figure out which airport you can transfer at without going into 14-day quarantine.

He said new procedures have to be guided by medical professionals across the entire value chain with instructions that the travelling public can understand. “It has to start at a high level and it becomes a universal rule for everyone, otherwise we will fail.”

Just as there will be airline consolidation, there will also be hub consolidation, similar to what happened in the US after 911. “There are three kinds of consolidation – involuntary consolidation, hub consolidation due to mergers and national consolidation.

“In Europe, there are so many hubs that are so close to each other – it’s a question to be thrown up. You might see a major shift in tide where hubs are fed by short haul operations to feed long-haul operations and the vast percentage of traffic will be taken by low cost.”

Who will recover first?

As to who will recover first, Harbison pointed to China’s 12-week cycle where signs of recovery are being seen. The question is, whether that recovery timeline can be replicated in other markets because China took draconian measures while the rest of the world are still in various stages of lockdown.

Meantime, those with strong domestic markets will have an advantage, with Mr Mueller citing China, Indonesia, Australia and the US. Harbison said to be a strong sixth freedom carrier, you needed the combination of geographical position and strong domestic market and he said China was in an ideal position to take that role.

Mr Mueller casted the net wider to Asia and he said we should look at the region as “Asia domestic” given that intra-Asia travel is such a huge market and to airlines operating in the region, Bangkok to Singapore or Jakarta to Singapore were not considered international routes.  

“If you look at the penetration of Covid-19 per capita in countries like Vietnam, Cambodia, Myanmar, it’s much lower and they also have lower fatality rates and so the psychological fear might go away sooner”.

He also believes that Middle Eastern carriers have one strength and that is – the world is their market. So, depending on which regions recover first – Africa, Asia, US and Europe – these carriers could activate regions, one after the other. While this could also be a double-edged sword, he reiterated this is their competitive advantage.

Low cost airlines will also come out of the blocks with “flying flags”, he said. “They have been so successful. The cash reserves of European carriers are led by the low cost airlines, which are nimble and agile, and they will be able to pick up demand as soon as travel restrictions are lifted.”

Low cost airlines in Asia will also fare well “because there are very few alternatives to air travel in the region and the economy in APAC is a shared one”.

Digitalisation takes a hit, could set the industry back 10-15 years

His biggest concern is that Covid-19 will take the airline industry back 10-15 years when it comes to digitalization. “We were at the stage where airlines were putting some CAPEX in the distribution and operations arena and my biggest fear is these funds will now not be available in the forseeable future.

“They will then fall behind banking and retail. This could throw the industry back by 10-15 years in terms of innovation on the customer side, the same goes for airports.”

He is optimistic though that the crisis might give rise to new win-win partnerships between tech and digital platforms and airlines like never before. “This would be a quantum leap and it’s a chance to pull together.”

So, are the golden days of travel over in terms of value fares and deals? Mr Mueller said corporate travel will be affected with fewer people allowed to travel and their class of travel downgraded. The trade war between China and the US had already set off a decline in corporate travel, “the cash cow of international airlines”.

In terms of leisure travel, with an increase in unemployment and declines in GDPs across the world, demand will also be suppressed.

And air fares are not likely to come down. “Airlines are about revenue per square foot and if there are fewer seats, ticket prices need to go up if the airlines need to be financially viable,” said Mr Mueller.

The good news on the sustainability front is fewer aircraft will mean fewer emissions but whether that’s worth the trade-off in terms of the huge hit on global economies is another matter, said Mr Mueller.

The masterclass ended on the note that the big winner in this crisis is the environment.

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