Predicting the unpredictable

ASM Global Route Development’s senior vice president for consulting and product development, Nigel Mayes, considers the impact COVID-19 has had on route development.

The impact of COVID-19 on aviation is clear to see from the pictures of parked aircraft and empty airport terminals to the vacant beaches and closed hotels. But what has been the impact on airline and airport networks?

What is recovery going to look like? And have we got any insights on the long-term impact of Covid-19? I shall attempt to address these issues in this article by offering some insight into the possible scenarios for the industry as we move forward.

Impact on airline-airport networks

Global seat capacity fell during the first lockdown to its lowest point in May to 20% of the 2019 levels and – despite a number of false dawns – talk about the shape of recovery has diminished, with the trend becoming one of a slow gradual build-up of capacity, characterised by fluctuations caused by new outbreaks and borders closing and reopening.

Currently global capacity is around 60% of 2019 for the month of June, but there are regional variations that reflect where there are larger domestic markets, as well as differing border opening policies depending on transmission rates or vaccination rates.

Some regions with large domestic markets, like the Americas, are showing a quicker return of capacity because of the domestic market in the USA has recovered well in the last few months.

Global seat capacity by region

The resilience of airlines during the pandemic has be phenomenal. In the pursuit of conserving cash and finding some pockets of revenues, carriers have learnt to become more dynamic in their planning, making short-term decisions and experimenting with new markets.

Since the start of the pandemic, globally airlines launched more than 2,128 routes (ASM route database, 1st March 2020 to 28th February 2021). A significant proportion of these routes were launch by LCCs, with some carriers being more creative than others. Hungarian ULCC Wizz Air, for example, launched 252 services and accounted for 12% of the new routes.

Carriers have focused on VFR traffic and sometimes new country markets. TUIFly, for example, launched services to Romania (Brussel to Suceavea), while Condor announced flights from Düsseldorf to Beirut and Sulaimaniyya, both targeting passenger flows that are still travelling for family reasons. This market will remain strong as people will want to connect to families quickly after the pandemic.

Although full service carriers have launched fewer new routes, many have still been reactive by switching capacity to leisure markets and slashing frequency on business services.

Lufthansa, for instance, launched a number of new leisure services to short-haul destinations from Germany, such as Greece, Spain, Tunisia, Egypt and Cyprus. While a number of US carriers have also started to operate to smaller, thinner markets targeting new leisure flows. In fact America Airlines (AA) has launched over 150 new routes for Summer 2021 and many of these are aimed at smaller leisure market sectors.

The return of business traffic is one of the biggest uncertainties, given its importance to airline revenues. ARC data from the USA shows business travel bookings are currently 72% down, while leisure bookings are down by 49%.

According to CAPA, although business traffic may only account for 12% of airline passengers, it represents 20-30% of their revenues and sometimes higher. Lufthansa, for example, stated that corporate bookings accounted for 45% of its group revenue pre-pandemic.

There are many push and pull factors working with networks. While some hub carriers have launched non-hub services serving leisure markets – like United serving St Louis – Hilton Head and Myrtle Beach – the great gravitation has been for carriers to retrench back to their core bases and hubs.

London Gatwick has only recovered 54% of its capacity in the peak month of August, while Heathrow is back to 74%. It is a similar story in other European cities. Dusseldorf’s August capacity is at 61%, for example, while Frankfurt’s is 67%.

Although the hubs may have a greater volume of business traffic, the need for airlines to drive operational efficiencies will no doubt see the main hubs hold onto their primary airport status.

Rise of cargo’s importance

Somewhat surprising, perhaps, is the fact that significant cargo has proved to be one of the biggest reasons behind airlines returning to some markets.

The new trend was probably best summed up by Emirates Airlines president, Tim Clark, who last November stated: “There is huge demand for cargo, with opening of 70-80 routes being driven by the need for cargo space, which is helping to reduce cash depletion significantly.”

While passenger revenue kilometres fell 69.7% for calendar year 2020, cargo tonne-kilometres were only down 10.6%, despite the dramatic loss of hold capacity.

Worldwide air freight volumes have held up as the global economy has remained relatively strong, boosted by e-commerce and growing perishable goods and pharmaceutical markets.

Global air freight rates have also risen and, at times, been three times higher than pre-pandemic levels. IATA states that “cargo revenues are forecast to rise to $152 billion per annum from $140bn, representing one-third of industry revenues. Pre-crisis cargo represented only 10-15% of the typical airline business”.

Qatar Airways has been aggressive in maintaining capacity during the pandemic and, as the world’s second largest cargo carrier in the world, has achieved this because of the strength of its cargo product.

With some trade flows, more than half of the cargo capacity is provided by bellyhold space on passenger flights, such as the North Atlantic market. Airlines have therefore launched new dedicated cargo flights to try and meet demand or taken more extreme measures, such as using passenger cabins to carry freight. Such flights have been christined ‘preighters’.

Of the three regional trade routes, the North Pacific is the only one to have grown, with the dedicated freighters and preighters filling the void (see below).

Every airline is now paying greater attention to cargo; even leisure carrier Tui operated more 500 preighters during 2020! As hold capacity returns, yields will soften and the preighters will disappear, but the greater integration of cargo evaluation into airline network decision making is unlikely to go away.

What will the recovery look like?

History tells us that traffic will return to 2019 levels at some point in the future as whatever global shock comes along, people’s desire and ability to travel continues.

IATA remains confident that traffic levels will recover by 2024, although the organisation caveats that with a large variance.

However, it seems certain that the recovery will be patchy, both in geography and in time. What is difficult to predict is what the future networks look like. Predicting the future is impossible, but the clues for recovery will are always in the current trends.

Domestic travel is returning faster than international travel but, while the appetite for long-haul flying may be suppressed, it is not so simple to say all short-haul markets will respond quicker than long-haul.

The UK-US transatlantic market is expected to return quicker than some short-haul markets, given a largely successful vaccine role out both sides of the pond. Demand responds to borders opening and carriers react by adding new capacity.

Some leisure markets will quickly regain capacity when restrictions are lifted. The table below shows the recovery in Portugal and Gibraltar after the UK government placed them on its green travel list, which does not require passengers to quarantine on their return to the UK.

Seat capacity recovery

Conversely, seat capacity on business routes will not grow quickly to 80-100% of previous and will be far slower than leisure travel.

It is not only a question of border restrictions, but there are other factors such as an employer’s duty of care, travel insurance, travel budget planning, the rising costs and complexity of travel, technology substitutes and employee hesitancy as well as a greater emphasis on sustainability (the ‘Greta effect’).

The speed and shape of recovery will also depend the appetite for countries to open borders. We estimate that in April 2021 only 3% of global borders are completely open.

Of those that are, some countries have taken a more aggressive approach to encouraging traffic back. Greece, for example, is welcoming visitors from a wide number of countries as long as passengers can demonstrated a negative PCR test and proof of vaccination.

They are offering sampling antigen tests, and any passenger with a positive test will quarantine for 10 days (cost covered). They have also focused vaccination on island destinations, offering jabs to staff working in the travel sector.

This approach has not been missed by the airlines. One commented that the Minister of Tourism had been proactive and visited them in person to provide confidence to return to Greece – and the early signs show that US capacity is holding up better to Greece that other European countries.

Indeed, only Greece and Turkey show a growth in capacity for the second half of the year, with seat capacity up 33% from the US (June to December 2021 v 2019). There have also been some significant new route announcements, such as United offering a new non-stop between Washington Dulles and Athens, starting in July.

What will the long-term Covid-19 effects be?

It will be many years before we understand the true impact of COVID-19 on the aviation industry and the levels of debt taken on by airlines will impact on future investment and ultimately some airline’s ability to survive.

For those that perform better, it will be their opportunity to capture market share and lucrative slots at constrained airports, a tactic employed by Wizz Air in its expansion of services at London Gatwick and Milan Linate.

We are likely to see smaller aircraft at the larger constrained hubs, too, not only from down gauging but from smaller aircraft being use to protect slots as IATA rules start to return.

Another driver to releasing slots will be the pressure from governments to shift short journeys from air to train, as is the case of the French government.

In the new world, there will be new entrants, which believe they can take advantage of the debt levels of their competitors. At the last count there were over 40 new start up carriers globally, and although it is unlikely that many will develop into significant market forces in the future, there are some that will be worth watching.

They include Breeze and Avelo in the US and Play (Iceland) and Flyr (Norway), both European new boys positioning themselves to fill gaps left by Wow and Norwegian respectively.

The new airlines will bring a fresh approach and more opportunities and challenges for the airports as they aim to build their networks.

The airport–airline relationship is set to evolve as deals become more focused on the short-term and more stakeholders are getting involved as the airlines seek to de-risk their costs and look to new ways to reach their audiences.

Indeed, it is already great to see more dialogue than ever before between airports and the airlines as to the aviation industry looks to kick-start its recovery.

Finally, one of the most significant long-term shifts will be the greater focus on the environmental impact of air travel, whether that is new fuels, new technology or the acceleration of the electrification of flight.

Predicting the unpredictable changes is difficult, but whatever the long-term implications of Covid-19 the industry will thrive again, as people’s desire to travel, connect and do business around the world will not go away.