2020, 2021 and some F Words
Reflections from MIDAS Aviation Partners and Associates on the aviation challenges for the new year and what we can be optimistic about.
John Grant, Partner, MIDAS Aviation
Every time I reflect on 2020 and its impact on aviation I keep coming back to the “F” word. The first time I want to use that word, well letter really, is linked to the financial impact on the whole aviation industry; losing some US$ 118 Billion in revenues compared to the previous year is something none of could have imagined. That “F” letter also relates to the financial status of many airlines; whilst some crowed at having billions of cash reserves most airlines around the globe suddenly realised that like any other business you need cash in the bank. Sadly, that was too late for many who in the space of four months saw their businesses destroyed. And finally, at least in the context of cash then “financial fairness” is another area that has played heavily on my mind; is it right that Alitalia get bailed again, that a cluster of legacy European carriers received financial support or guarantees/investment from their Governments whilst others were left to fend for themselves.
Is that fair when it encourages the wrong sort of corporate behaviour from some protected carriers?
The “F Word” also reflects frustration at how Governments and indeed regulators and many trade associations have supported and handled the pandemic. Many Governments simply pulled up their ladders and closed borders, took unilateral decisions and frustrated many airlines with overnight changes to policies without any data supporting those decisions. Quite why trade associations required months to develop a series of travel protocols for their members and airlines to follow still astounds me. The irony is of course that those numerous countries that closed their borders are the same ones now seeking supplies of vaccines and then looking to those airlines that they failed to bring back the much needed corporate and leisure traveller. Airlines have worked tirelessly to keep operating, adjusting their schedules and networks on a weekly basis but ask any airport or airline in an off-the-record chat and they will tell you how frustrated they have been. Will that frustration ease in 2021? Only when vaccines have been widely distributed will the excuses begin to run out for continual lockdowns.
Fake news is another “F” word for the airline industry in 2020. The sensationalism with which the mainstream press and social media have covered the industry has been more about column inches of copy than hard facts. It is hard to think of any industry that has taken more steps to ensure the safety of its customers, introduced travel protocols and screening processes because health authorities failed to act then it’s the airline industry. Those positives are frequently ignored by the press who prefer to focus on the passenger who flew with Covid-19 or the middle seat being left open or the occasional full flight; the quality of journalism during the pandemic has been frightening. Let’s hope that 2021 will see a more sensible factual approach from the media….we can but hope.
Fortunately, the “F” word kicks off the future and hopefully 2021 will be a much better if still bumpy year than the one just passed. Whilst the news seems full of increasing Covid-19 cases, new variants, new lockdowns and the strain on hospital beds behind all of this are a series of vaccines that will in time defeat the pandemic. But that process will take time, especially if left to the same leaders who have managed the event so well to date; giving the task of distribution to Amazon or DHL would seem a wise call at this stage. But behind the current short term challenges the indicators are very encouraging for the second half of the year; and I’ve covered many of them in a blog for OAG you can find here.. https://www.oag.com/blog/2021-aviations-year-of-recovery
There is so much pent-up demand and disposable income available that once the barriers to travel are removed we should expect a very sharp rise in booking activity and a pretty quick return to normal travel behaviour. Yes, leisure and VFR travel will return first, regional will rise before long-haul and short notice booking profiles will be the order of the day but by July the market will have bounced back, and yields will be back to near normal levels. Business travel is more likely a fourth quarter recovery scenario given that the third quarter is traditionally the peak leisure period anyway.
And perhaps the best part of the whole recovery will be the way that airlines, airports and travel distributors reposition themselves for the “new normal”. An airlines’ 2019 network is not the starting point for their 2021 operation; it will have a large bearing, but new market opportunities will be looked at in more detail. New carriers are already beginning to launch in Europe, Asia and the America’s; if they can get past the first few years of operation then they will be well placed to take advantage of the full recovery without any large debts to repay.
But most importantly perhaps destinations and leisure markets will have spent 2020 reflecting on their product, how they position their destination and market to attract both new airlines and airports. Some resorts will have completely rethought their position choosing to attract higher yielding travellers with an eye to their sustainability credentials whilst others will have looked at how to adjust their offering to more than a mere sun and sand holiday. I’d personally take either if it meant travelling again!
Ultimately only time will tell but I remain hugely optimistic that if and when we get into the second half of 2021 the aviation industry will be in a much better place that it is now and indeed may be in a better place than it was before 2020 and that has to be something exciting to look forward too this year.
Hannah Pearson – Associate in South East Asia
As 2021 hurtles towards us, the question on everyone’s mind is: what will change for Southeast Asia’s tourism? Borders have been all but shut since early March, leaving the region to rely on domestic tourism. Whilst some markets, such as Vietnam or Indonesia, have a large population and a diverse landscape making domestic tourism a feasible earner, others such as Singapore, are not so fortunate.
The major challenges for 2021 in the region are:
- 3-speed recovery: as we’ve seen in late 2020, you are only as strong as your neighbour. So long as countries such as Myanmar or Indonesia are struggling to contain COVID-19, there will be inevitable leakage across the land borders to neighbouring countries, triggering local outbreaks.
- Reopening the borders: shutting down the borders was easy - but how do you unlock them again? No Southeast Asian nation has cracked the code yet, with Thailand’s Special Tourist Visa barely making an impact, and Singapore’s hyped travel bubble arrangements generating very few visitors. Add to the mix the different timelines for vaccine implementation across the region, and borders are going to get very complicated indeed.
- Airlines’ financial health: 2020 has seen some national airlines, such as Garuda Indonesia and Vietnam Airlines, obtain financial aid from governments. Other airlines, in Malaysia and Thailand, have still not secured any government aid. There is only so long airlines’ funds can last without international commercial flights restarting in earnest. We have seen employees cut, and routes pared back. When international travel does make a comeback, how quickly can these scale back up to meet the pent-up travel demand?
Southeast Asian tourism has hit rock bottom in 2020. The flip side of that is now, the only way, surely, has to be back up. Singapore has already received its first shipment of the Pfizer vaccine, and is determined to keep finding new ways to unlock its borders. And I am optimistic that by setting this cautious example, other Southeast Asian nations will (slowly) follow suit.
2021 will be no 2019. But it does have shot at being a better 2020.
Becca Rowland – Partner MIDAS Aviation on Latin America
Economic turbulence, political uncertainty and the burden of debt are nothing new in Latin America but add COVID-19 to the mix and the aviation industry has an even more difficult path to navigate that usual. By year end three of the most well known names in Latin American aviation remain in Chapter 11 bankruptcy – LATAM, Avianca and Aeromexico. Avianca has been the flag carrier of Colombia since 1919 and this is the second time its entered bankruptcy protection so maybe it can survive a few years more. Moreover, new restrictions on travel are still being put in place as Peru’s mandatory 14 days quarantine for arrivals from 4th January demonstrates.
Meanwhile, COVID-19 will continue to leave its mark on the industry long after we’ve all been vaccinated. Some airlines have already disappeared and more may do so, especially given the relative lack of resources available in Latin American countries for governments to provide financial support. Remaining airlines will be smaller and operate fewer flights. Some low cost carriers, such as Volaris in Mexico, will come out of this with a stronger presence, able to compete aggressively given their already lower cost base and relatively larger cash reserves.
We all know that domestic aviation markets have been recovering sooner than international markets but whereas international air travel markets are usually dominated by travel within a region, in Latin America international air travel has always been dominated by travel to and from the US and Canada. While Canada has restricted travel from abroad, open borders and the buoyancy of the US market to some sun destinations offers a glimmer of hope for airlines going into 2021. January 2021 capacity data shows that US-Mexico seats are just 0.7% below where they were in January 2020, while capacity from the US to Haiti, US Virgin Islands, Dominican Republic and El Salvador are all above last years’ capacity.For many Latin American countries and their aviation industry, it seems that they will need to keep a close eye on the US in 2021
Ogaga Udjo – Regional Partner in Africa
We ushered in 2020 with a cautiously optimistic expectation for African Aviation; although profitability was expected to be down by USD$ 200m, RPK and ASK growth was forecasted at 4% and 5% respectively. The “wings of change” across the continent came with the sentiment that the continuation of historical inefficiencies was not sustainable. 2020 has seen significant changes in African aviation, and although Covid-19 has been devasting, it was not the cause of several challenges, but rather an aggravating factor.
At an industry life-cycle perspective, we can classify African airlines accordingly:
1. Mature Airlines – there is a need to understand the way forward with established airlines who have been in a period of overhaul & review – such as SAA, Comair, Air Namibia, Air Zimbabwe, TAAG Angola, LAM, Kenya Airways and Egypt Air.
2. Phoenixes rising from the ashes – there is renewed interest in national carriers such as Zambia Airways, Uganda Airlines and Air Tanzania.
3. Airlines on a growth trajectory - some of which are newer to the market like Africa World Airlines and Air Peace, and other established strong performers Airlink and Ethiopian Airlines.
4. Start-ups – there are several start-ups in different phases of development in the region.
The expected implementation of the Africa Continental Free Trade Area (AfCTA) in 2020 meant much was needed to be done by various Member States for aviation to play its part but, as ever, implementation has left a lot to be desired.
Running through African aviation is the strong link between State ownership/influence and the industry but this doesn’t always make for successful airlines. The pandemic has exposed the weakness of many African airlines; is it wishful thinking to hope that the current situation will act as a spur to airlines and governments address structural issues such as gaps in policy, safety, financing and infrastructure.
So far, Government support has been fragmented. About 10 countries have provided targeted relief to aviation and about US$30bn has been pledged cumulatively, and Government responses will play a key role in recovery.
In 2021 we expect the key trends in African aviation to be regionalization and consolidation:
· With Africa already having strong economic blocks, where macro-economic policies are integrated to support trade and the free movement of people and goods (SADC, ECOWAS, EAC etc), it is likely that airline networks will increasingly map this. There has been some duplication across carriers and markets, but with the weak position of several African airlines and an expectedly smaller industry emerging, coupled with constrained national budgets, tough decisions will have to made about how markets will be operated and how airlines cooperate in order to ensure survival.
· We can’t talk about regionalization without consolidation, which is largely through national carriers, however some private entities too. This is still unfolding, however the expectation is that markets will correct themselves to a certain extent. An interesting example is the case of South Africa, with several airlines expanding regional links on previous SAA-dominated routes; and domestically, FlySafair aggressively expanding and the launch of new LCC Lift, taking advantage of Comair’s (owner of Kulula.com) weakened position.
For African Aviation in 2021, the old African adage rings true – “If you wish to move mountains tomorrow, you must start by lifting stones today.” We must increase our efforts in shifting the position of the industry towards sustainability and commercial agility.