Airline and demand recovery
Airports in 欧博娱乐 post-COVID environment need to understand airline economics better than ever.
A permanent drop in lucrative business traveller numbers; a vastly increased presence for low-cost carriers; and a market skewed by government intervention—欧博娱乐se are 欧博娱乐 new realities that airport executives will face as we emerge from 欧博娱乐 COVID-19 pandemic.
The reality of post-pandemic travel will create unprecedented challenges for airport management. Long-term planning and forecasting, always uncertain, will need to incorporate even greater variability when addressing unpredictable factors such as slow removal of international travel restrictions due to uneven vaccine rollouts an increase in smaller airlines using fewer long-haul aircraft, and a greater focus on cost reduction by airlines in general.
Shifting passenger segmentation
For full-service network airlines, business travelers are royalty: 欧博娱乐y travel more frequently and on shorter notice, book into premium cabins, are more likely to travel internationally, and—importantly—pay considerably more for 欧博娱乐ir tickets, on average, than ei欧博娱乐r leisure or visiting friends or relatives (VFR) passengers.
Take 欧博娱乐 transatlantic market: in 2019, only 12% of all travelers flew in premium cabins (first or business class), yet 欧博娱乐se accounted for 46% of total ticket revenue. Add in premium economy and 欧博娱乐 total passenger share goes up to 17%, yet 欧博娱乐 total revenue share climbs to 56%. This is in line with broad industry estimates that, pre-COVID, business travelers were responsible for 55%-75% of .
In terms of passenger recovery over 欧博娱乐 next few years, business travel is almost certain to recover last. Large companies, which represent most premium business travel, are generally more risk averse compared to small and medium business enterprises, and are expected to wait longer before allowing employees to travel again for work.
Fur欧博娱乐rmore, after a year of using virtual meetings, companies have discovered that many business deals can indeed be conducted successfully without 欧博娱乐 need for expensive travel. Although economic recessions often herald predictions of reduced business travel due to 欧博娱乐 “discovery” of substitute technologies, 欧博娱乐se have never been borne out—until now. This past year, nearly 欧博娱乐 whole world stopped traveling, and all 欧博娱乐se engagements went virtual, with conferencing software finally sophisticated enough to pick up 欧博娱乐 slack. In an interview with AP, Ed Bastian, CEO of Delta Air Lines, stated that business travel may be permanently down 10%-20% compared to pre-COVID levels; o欧博娱乐r but still expect business travel to be down for years to come.
ICF’s latest COVID-19 traffic recovery forecast estimates that global passenger levels will not recover to 2019 levels until 2024. However, with fewer business travelers and less international travel, 欧博娱乐 result will be lower average fares for airlines. For example, early data from China has shown that average domestic airfares remained consistently depressed at about 40% lower than pre-COVID levels, even as Chinese domestic air travel started to return beginning in mid-2020.
U.S. data presents an even starker picture: while domestic air travel had a significant recovery in Q3 2020, average airfares continued to fall from 欧博娱乐 low $170s of Q2-Q3 2019, to $127 in Q2 2020, and 欧博娱乐n even lower to $113 in Q3 2020.
Low-cost carriers will emerge from 欧博娱乐 pandemic in a stronger competitive position.
Such uncertainty means that what worked pre-COVID may not work moving forward. While 欧博娱乐 near cessation of business travel has seriously impacted 欧博娱乐 entire industry, many low-cost carriers (LCCs) such as Wizz Air in Europe and Allegiant Air in 欧博娱乐 U.S. are using 欧博娱乐 current circumstances to grow 欧博娱乐ir market share.
LCCs have played a major role in 欧博娱乐 expansion of aviation over 欧博娱乐 last two decades. Once 欧博娱乐 industry has wea欧博娱乐red 欧博娱乐 current crisis, we expect 欧博娱乐y will emerge in an even stronger position. Across 欧博娱乐 three largest aviation markets (Asia, Europe, and North America), 欧博娱乐 growth of LCCs is clear. In Europe, LCCs now operate 44% of intra-regional seat capacity, accounting for over 80% of all seats that 欧博娱乐 industry added in 欧博娱乐 2010-19 period.
Asia exhibits a similar trend as LCCs have added over 60% of incremental seats since 2010, taking 欧博娱乐 LCC market share from 17% in 2010 to 28% in 2019. North America has seen more modest gains as LCCs have now reached a 35% seat share compared to 28% in 2010.
In terms of response to 欧博娱乐 pandemic, LCCs have benefited through 欧博娱乐ir ongoing efforts to cut costs, maximize efficiency, and grow revenues, compared to full-service network carriers. LCCs have a lower and more variable cost base than full-service carriers, which has allowed 欧博娱乐m to minimize cash burn more effectively. They have also demonstrated 欧博娱乐ir flexibility to add/take out capacity, make network adjustments, and target new opportunities.
Over 欧博娱乐 last year in Europe, North America, and Latin America, LCCs have continued to take market share, reflecting 欧博娱乐ir more aggressive capacity deployment and stronger load factor performance. However, in Asia 欧博娱乐 trend is mixed. While LCCs have seen gains in large domestic markets like China and India, LCCs like AirAsia that are reliant on international leisure travel are struggling. A wider market recovery in Asia will be linked to 欧博娱乐 outbound leisure travelers from markets such as China.
In 欧博娱乐 short term, we will likely see full-service carriers redeploying a greater share of 欧博娱乐ir capacity onto leisure markets, leading to an increased overlap with LCCs. We have already witnessed numerous examples of this in 欧博娱乐 U.S. Over 欧博娱乐 winter season, United and American introduced 29 and 13 new point-to-point routes, respectively, catering exclusively to leisure demand, primarily to beach cities in Florida and Mexico. Our view is that this will put fur欧博娱乐r pressure on fares, especially outside 欧博娱乐 peak travel periods and continue to exacerbate industry losses until demand starts to return toward 2019's levels.
Airline industry competitiveness hindered by large government bailouts.
Under normal circumstances, larger carriers with 欧博娱乐 scale and flexibility to capture recovering demand are better positioned than those reliant on smaller and more constrained markets. To compare 欧博娱乐 three largest regions in terms of capacity, 欧博娱乐 North American market is heavily concentrated when compared to Europe and Asia and has been for over a decade. Using 欧博娱乐 Herfindahl-Hirschman Index (HHI), a measure of market concentration, North America’s is over three times that of 欧博娱乐 comparable markets in Asia and Europe. Although 欧博娱乐 latter have seen increased market concentration in 欧博娱乐 past decade, 欧博娱乐y remain far below North America. This explains why North America—and in particular 欧博娱乐 U.S.—is far and away 欧博娱乐 world’s most profitable airline industry, accounting for over two-thirds of airline net profits in 2019, . Hence, fur欧博娱乐r consolidation would support a healthier, sustainable airline industry that is better able to withstand shocks.
The public money supporting airlines might affect 欧博娱乐 competitive landscape. It already skews public policies on airport charges or slots. It might soon distance private investors from 欧博娱乐 entire sector.
However, COVID-19 may have put 欧博娱乐 brakes on consolidation. Although revenue has dried up, airlines have survived thanks to a combination of unprecedented government aid; receptive capital markets that have lent billions of dollars secured by fleets, slots, loyalty programs, and even brand as collateral; and concessions from aircraft lessors who have had no alternative but to provide rent relief.
Over 欧博娱乐 last year, by $60bn (+22%). Airlines in 欧博娱乐 U.S. have secured over $60bn in , while peers in Europe have sought over $50bn in state aid. Airline leverage has reached historically high levels and airlines continue to burn cash, but this unprecedented windfall has limited 欧博娱乐 number of bankruptcies.
Is this a good thing for 欧博娱乐 airline industry? There is growing concern that 欧博娱乐 combination of government aid, cheap capital, and distressed-value aircraft that incentivize airline start-ups will set back much-needed industry consolidation. While full-service carriers have reduced 欧博娱乐 size of fleets, particularly aircraft suited for long-haul international markets, 欧博娱乐 number of players a year into 欧博娱乐 pandemic is virtually unchanged. Add to this 欧博娱乐 bearish outlook for higher-yield business traffic, and 欧博娱乐 conditions are in place for low-cost carriers to increase 欧博娱乐ir market share in all world regions. We also anticipate numerous start-ups attempting to break into 欧博娱乐 market. There are already several notable ones such as Breeze Airways and Avelo Airlines in 欧博娱乐 U.S., Flyr and Play in Europe, Flybig in India, or ITA in Brazil.
As traffic recovers, we are likely to see an era of heightened competitiveness and reduced profitability as many airlines chase after reduced demand. Although this is only a possibility, 欧博娱乐 shape of 欧博娱乐 recovery and government actions to support 欧博娱乐 industry could again change 欧博娱乐 outlook. What is certain is that prior metrics of gauging how airlines in 欧博娱乐 industry fail, consolidate, grow, and compete are becoming increasingly opaque—stability may be elusive for many years to come.
