The International Air Transport Association (IATA) is a trade association that represents 290 airlines that handle 82% of the world’s air traffic. Among a wide variety of functions and services, it compiles and publishes statistics on passenger airline traffic. As a grounded frequent flyer, it is interesting to follow the way Covid-19 is affecting the airline industry and speculate about when and how it might recover.
June 2020 passenger traffic revealed a painfully slow recovery. Traffic measured by Revenue Passenger Kilometers (RPK) fell 86.5% compared to last June. That is only slightly better than 91.0% contraction of RPKs in May. RPKs represent the total number of kilometers passengers fly. Available Seat Kilometers (ASK) are equal to the number of available seats multiplied by the number of kilometers flown.
The June Passenger Load Factor (PLF) set an all-time low at 57.6%. Passenger Load factor is the average percentage of seats that are filled per flight. Earlier this year before the pandemic hit, U.S. airlines enjoyed PLFs of 90% and above. Those load factors were great for airline profits, but as airlines have reduced the space between rows, pretty lousy for passenger comfort. You’d have to be super lucky to wind up sitting next to an empty seat in coach when the average plane is 90% full.
IATA reports a slight improvement in traffic from May due primarily to increased domestic air travel particularly in China. International markets continue to suffer from the restrictions many countries have on admitting foreigners, weak demand for discretionary travel due to concerns for safety in flight and for travel in general, and nearly non-existent business travel.
These are June statistics for international flights:
The statistics for domestic flights:
It appears that in computing load factors, IATA is not adjusting airplane capacity to reflect the practice of blocking the sale of middle seats. Alaska Airlines, JetBlue, Delta Air Lines, and Southwest Airlines are four of the airlines currently blocking middle seats.
IATA predicts that overall airline traffic will remain severely depressed for the foreseeable future and will not return to 2109 levels until 2024. Domestic travel is expected to recover faster than international. IATA expects a gloomy outlook for air travel even if a vaccine is developed in coming months.
To this layman, it seems the current state of airlines and travel is likely to lead changes in the industry. Some are favorable to passengers. Most are not.
- Empty seats and few business travelers will lead to lower fares
- Airlines will seek additional government bailouts
- Government ownership (partial or total) will expand
- The use of “travel bubles” will expand
- Airline service may never return to pre-virus levels
- Private jets may handle a greater share of business traffic
Many airlines are already offering deep fare discounts. It is the basic law of supply and demand. As the supply of airline seats greatly exceeds current demand, prices should fall. Airlines have parked many planes; yet the excess supply of seats continues. It will be interesting to see how long that lasts.
In the U.S., airline mergers have turned the industry into a quasi oligopoly. Led by the Big 3, American, Delta and United, the industry structure has helped them maintain great capacity discipline over the last few years. By limiting the supply of aircraft seats over the last few years, airlines have been able to achieve load factors reaching the 90s. They have resisted temptations to seek additional market share by adding capacity and cutting prices to fill seats. That was always the downfall of airline profitability in the past.
Airlines worldwide have already sought and received an initial round of government bailouts and they are already seeking more help from taxpayers. Not only will taxpayers be on the hook for saving the airlines, loss-carry forward tax rules mean that it is unlikely airlines will be contributing tax revenue for years to come.
In the U.S. public assistance has come with requirements to avoid involuntary layoffs and reductions in pay. With many airlines being overstaffed, there may be pressure to increase flying to give them something to do. If so, that would only increase the need to lower prices.
As part of the financial assistance to airlines governments may take ownership interests in, increase their ownership of, or completely nationalize one or more air cariers based in the home country. Alitalia was nationalized in March. It is unclear how that will affect travel.
To increase international travel and tourism countries have been creating “travel bubles.” In a travel bubble two or more countries that have successfully contained the virus agree to open their borders to each other, but keep their borders closed to countries that have ongoing spread. For those who qualify, this makes travel more convenient by eliminating requirements like quarantines and gives travelers greater assurances of safety. The problem with travel bubbles is their durability. Coronavirus hot spots can pop up even in countries that have done a good job in controlling Covid-19. Spikes in the level of Covid-19 should burst the bubble.
What I fear the most is that service levels onboard and in airport lounges won’t return to normal once the virus abates. Service is greatly reduced for safety reasons now. But airlines will be reluctant to bring back many of the services they are eliminating in order to keep costs low and increase profitability.
The number of airlines offering international first class has steadily decreased over the years. With changes to service because of Covid-19, paying $15,000 to $20,000 for a first class seat makes little sense now if it even did before. The fact that more airlines are introducing enclosed “suites” in business class, further diminishes the difference between business class and first class. Flying in first class on award tickets was one of the best parts of accumulating credit card points and airline miles.
Some predict that more businesses will turn to charter business flights or company owned jets rather than commercial airlines for future business travel. That makes some sense because private jets can be safer from the standpoint of Covid-19. Social distancing is more easily achievable on a private jet, and there are fewer passengers. Passengers are more likely to know each other, and they can all be tested if desired.
To the extent that more of the high-revenue business passengers use private jets, airlines will want to cut costs by not returning to pre-Covid-19 service levels.
Covid-19’s financial effects on the airline industry will have positive and negative effects for passengers. There will be some lower fares, but it seems unlikely that service onboard or in lounges will return to Pre-Covid-19 levels for many years. Blocking middle seats in coach is one current practice I would love to see continue, but there is no way airlines will do that.
What are your thoughts on what air travel will look like after Covid-19?