The Future of Airlines

Frank Terner, former CEO of Air France, and an Expert in the airline industry, had the kindness to provide us with his insights on how the Coronavirus has affected the Airline Industry and the potential outcomes for the sector.

 

2020 will mark a milestone in the recent history of our world as we are facing a pandemic on a scale that has not been seen in over a century.

The world is at a standstill, compartmentalized, confined, and with it all modes of transport due to a lack of demand.

Air transportation is hit hard, bringing with it a whole section of the economy: manufacturers, maintainers, ground handlers, airports, tour operators – all types of links in the value chain are affected. Nearly all air transport is at a standstill with almost 90% of airplanes grounded.

 

The question, subject to a lot of debate, is obviously the form of recovery: all the letters of the alphabet goes through it – L – V – U – …, even W. The only certainty is how uncertain the current situation is.

On closer inspection, wouldn’t the recovery take the form of an A followed by an L ?

Air transport experienced a period of strong growth after the crisis of 2008. What if 2019 was a spike? We’d think so. Most analysts and executives are predicting a back to the 2019 level by 2023, if not 2025…

This long interim period is already forcing companies to adapt in a structural way, by reducing their size. Some will fail, others will be absorbed. A succession of major redundancy plans has been announced, as well as declarations of aircraft order postponements or permanent fleet shutdowns.

 

My feeling is that a plausible scenario for the aftermath would see in the early years the large companies contracted, then the appearance of Groups, or conglomerates from consolidations, taking over market shares left vacant.

Several variables will influence these scenarios: the ability to get through the crisis, the customer behavior – therefore the volume of demand, the constraints imposed by the States in counterpart for their support.

 

The question of the relative health of Low Cost compared to Legacy is a hotly debated topic, and with it the relevance of the large HUB model. Who will be the winners?

Low cost companies are entering the crisis with high liquidity and are therefore resilient. But they have made air travel a “commodity”. Their model could be seriously challenged by environmental pressure, which is coming out of the crisis stronger than ever.

The large HUBs have been designed to concentrate small flows in order to route them in a cost-effective way – filling a 400-seat aircraft every day is not that easy. The contraction of demand seems to me revalidating the notion of HUB, or at least of a sustainable «connection» in the medium term.

 

Smaller, single-aisle long-haul aircraft may well play a key role in this future, by fitting efficiently into this landscape on small traffic flows. Unless demand is so low that they become a new standard, including on HUBs? Frankly I don’t believe it…