Flying in the New NormalityBy Carlos Robles | Wed, 06/24/2020 - 08:32
The world is entering a “new normality,” a new way of living that means a total reconfiguration of our day-to-day behaviors and activities, and that includes the way we used to fly as well. Many new policies related to transiting at airports and safety of flight have not been fully disclosed yet. We know we need to keep at a safe distance from other people, wash our hands as much as possible, and clean surfaces constantly. Six months ago, that was somehow logical, but these days it is a new obsessive reality regulated with policies and in some places even with severe punishment if not respected. How will the pass-through at airports change for many of us who were used to transiting almost eyes closed? What is going to be the configuration in every type of aircraft? And how will airport and in-flight services be delivered, assuming any service known so far will continue to exist in the future?
I think up to this moment there are more questions than answers. As of today, there are clear challenges on how airports will be managed, how airlines will perform, and the only thing that is clear is that the way passengers used to fly has changed, most likely forever. Tourism has been one of the activities most impacted by the pandemic and closely related to it for obvious reasons is the commercial aviation industry. As many countries are arriving to a re-opening of their economic activities, we are starting to get new data highlighting trends in the sector, mostly related to business travel. All these data are pointing toward an impact for the aviation industry and the business model of airlines that definitely will change the way we design aircraft, and those new economics will ultimately impact manufacturing volumes.
Life at airports for some of us frequent travelers will change in many ways. No more different zones to board or priority accesses. It does not matter how frequent you travel or how loyal you are to an airline anymore. What matters is what kind of risk we represent as travelers for other people and for the airline’s reputation as well. And all this does not even consider having health visas that allow you to visit from one country to another. It sounds very extreme, but believe me, it is not my idea. Wait and transit times will grow longer as on top of security checks we will need to pass health checks and sanitization gates both at departures and arrivals. All of the above translates to different infrastructure at airports that will require more space and therefore some level of investment or new configuration. It translates to additional costs for the airlines and their customers. Service will need to be delivered in new innovative forms and technology will jump years ahead for the process of documentation, security checks, baggage management and boarding. The more the technology involved, the less human contact there will be in a segment that was characterized up to now by human interactions.
The in-flight experience will be characterized by services, food and entertainment delivered with little if not zero human contact. Many of the traveler kits will no longer be for the enjoyment of the passengers themselves, but for the sanitization of spaces and isolation from other people. The crew will be more focused on applying health and safety procedures rather than servicing customers and providing an experience like before. Sanitization protocols will be key to ensure a safe environment but that will cost more and most likely will increase the turnaround time of aircrafts on the ground. The configuration of planes will change. Narrow body aircraft with three-seat rows will leave the space in the middle empty, leaving 33 percent of the available capacity per plane unused. It gets worst for wide bodies, where the empty seats will go as high as 40 percent and regional jets and turboprops up to 50 percent. All I have written so far might simply represent adjusting ourselves to new ways of traveling. What worries me is the impact on the economy of airlines and lastly, their viability.
According to IATA Economics, the new seating configuration to allow distancing among passengers will increase prices between 43 and 54 percent on average to bring to 62 percent the number of seats occupied, which in an already very low demand market is not sustainable. If we accept that airlines can operate at a 62 percent weighted average of seats occupied, according to the same analysis only four airlines from a sample of 122 would do a break-even business or better, the rest would not reach the break-even point.
On top of that, demand is very low. China, for example, is returning to its economic activities. It has seen that even with a reduction in ticket prices of around 40 percent and having increased bookings by 235 percent from mid-February to the end of April, that is still around one-third the volume of tickets sold before the COVID-19 pandemic struck the country. The other trend is that before the pandemic, 46 percent of the bookings were made in the three days prior to travel. That number has increased to 61 percent due to the uncertainty among passengers and the fear of canceled flights or itinerary changes, plus factors like there being no risk of overbooking, or no need to purchase far in advance to get lower prices. This is impacting the cash flow cycle of airlines, which used to be pay now, get the service many weeks after the purchase date.
I personally believe, the recovery of miles per passenger will take between two to three years to come back to the levels we had at the end of 2019. Recovery will start with domestic flights and eventually, once some confidence is regained, it will reach international flights. I do think long-haul flights will be severely impacted and these will be the last to recover. The ability and flexibility to adapt fleets and routes in addition to the financial management of airlines will be crucial to determine who will remain in the market and who will simply disappear. While some governments in Europe and in North America are already considering financial aid to airlines, most Latin American airlines will not get a penny because social programs will take most of the limited resources of the region.
MRO services are also seeing a disruption as the maintenance cycles are now harder than ever to forecast, and more than working they had to change the model to provide parking services and on-ground maintenance to keep aircrafts ready to fly again. According to Ascend, at the end of May, more than 50 percent of the world’s fleets were parked. As if this were not enough, oil prices are historically low, and it seems they will remain at those levels for a while. That means many inefficient old aircraft that were parked due to their high cost of fuel per flight will now be available to re-enter service. This will delay purchases of new aircraft by airlines as far as they can fly those old but still usable planes given the moment when ticket demand calls for those seats.
We need to wait for a while and see how market trends influence the way airlines reconfigure themselves. I do not think it will be very different from region to region, and we can take the patterns shown by China as a right trend into how the future of traveling will look. Some airlines will adapt quickly through innovation, some others will disappear, but no matter the scenario, I am taking as a given that demand for new planes will fall around 30 percent at least. In the short term, that will hurt manufacturing operations but in the long run it means a breath of fresh air for an industry in which demand was by far bigger than installed capacity to cope with it. It also will provide some extra time for a big market share owner like the Boeing 737 MAX to be re-certified. Strategically, the opportunity to realign supply chains should bring new opportunities for suppliers in Mexico and other new entrants to the sector globally, but it will take some time before we can really see those new projects materialize.