CommentarySociety

Fasten your seatbelts – the world aviation market is falling down

Airlines throughout the world were among the first to feel the impact of the coronavirus. Air traffic occurred in a turbulence zone: a mass cancellation of flights and layoffs are taken place. One also talks about possible bankruptcies. Due to the spread of coronavirus, 2020 may be the worst year for airlines, at least since the 2009 financial crisis. The direct losses of just Ukrainian airlines and airports have exceeded than UAH 2 billion. Promote Ukraine has asked experts what to expect from the aviation industry around the world.

Bohdan Dolintse, Aviation Expert, Director of the Institute of Management and Strategies 

Today, the world aviation market is waiting for the resumption of air traffic and is preparing for large-scale changes. First of all, for checking the passengers’ body temperature in terminals and before boarding, testing, rising ticket prices and no food on short flights. In addition, some airports have already introduced mandatory COVID-19 testing for arriving passengers.

Airlines expect such measures to be temporary and reviewed regularly to identify more effective options or to eliminate those that will not found to be efficient enough.

Such unprecedented measures lead to an increase in carrier costs and are expected to provoke a 54% increase in ticket prices compared to year earlier.

Further, the strict social distancing application also leads to a reduction in airports capacity by a third. For example, to keep the distance when boarding 189 passengers, the queue at the airport has to be 380 meters. In the current environment, domestic markets will play an important role in the resumption of air traffic. Today they make up 80% of world air traffic when in the pre-crisis period this figure reached only 30-40%.

The latest data from industry associations give hope for the market to return to pre-crisis level over the next 2-3 years, and it may take up to 10 years for the market to fully recover and return to the previous pace of development. Ukrainian airlines and airports alone have already suffered direct losses in the amount of more than UAH 2 billion. If we estimate the losses of all enterprises in the aviation industry in general, they will amount to 10 to 15 billion hryvnias by the end of the year according to the Aviation Committee of the CCI evaluation.

Semyon Kravtsov, partner, lawyer at Inpraxi Law Firm 

Without exaggeration, the period of global social isolation caused by this pandemic appeared the most difficult and crisis time for aviation. We read high-profile headlines in the media almost every day: states are closing their borders, flights are being cancelled, airports are empty, the staff is being reduced, millions in losses and airlines are on the verge of bankruptcy. In addition, aviation-related industries such as tourism and cross-border activities are also paralyzed.

Among the many expert forecasts for the future of civil aviation: from pessimistic to moderately optimistic, one thing is clear – the path to the resumption of air traffic will be long and thorny. Although one cannot exclude that after the quarantine cancellation, many financially capable citizens will act under a “revenge spending” factor, when financial expenses are increased due to revenge for lost time.

In any case, times of despair require desperate actions and companies try to survive in all possible ways. Government assistance is generally considered as one of such ways. Let’s consider the options for its distribution – loans, credits provided by shareholders of the company, the acquisition of companies shares.

The recent case with the multibillion-dollar support of Lufthansa in Germany opened several important and very sensitive issues. First and foremost – the competition. Although such aid by the federal government is the subject of approval by the European Competition Authority, Ryanair, led by CEO Michael O’Leary, plans to challenge the government’s aid. Since such a step puts all the players in the industry, who also suffer multimillion losses, in an unequal position.

The second point which requires attention in the Lufthansa case is corporate governance and investor-dictated business process adjustments. In an effort to avoid aggravating Lufthansa’s huge advantage of almost € 10 billion, the European Commission wants the airline to loosen its controls at Frankfurt and Munich’s main hubs and reduce its German-based fleet. Obviously, this is a very painful compromise for the airline.

Reducing the flight network is another optimization option for airlines. For example, the Ukrainian system-wide carrier Ukraine International Airlines has suspended long-haul flights (New York, Toronto, Delhi) at least until April 2021. Air France also had to optimize its routes. Upon the French government request, the company has reduced its internal network and thus opened new prospects for trains.

Another painful problem for the aviation industry stems from massive layoffs. Austrian Airlines has shown the most correct way out of the situation. Having reached an agreement with its staff to reduce salaries, the company not only saves hundreds of jobs but also saves about 80 million euros annually.

Besides, the crisis has significantly affected the airports’ infrastructure. After the air traffic resumption, airports must implement all necessary measures for social distancing, which will increase the duration of check-in and boarding/disembarking.

At the same time, the long stay of passengers at airports due to the complicated check-in procedure provides additional opportunities for shops, cafes, business lounges. Another issue is the marketing strategy, which airlines need to review and improve as much as possible by expanding the list of services. Though, let’s remind that Duty-Free business halls and stores will be temporarily closed.

Finally, I will note that reducing costs and optimizing operating processes will be the motto of most airlines at least for the next year. However, in the end, the period of crisis is a great time for improvement and further development. Therefore, fasten your seat belts and prepare for takeoff.

Natalia Tolub

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