INDUSTRY TRENDS: COVID-19 impact on US airlines and outlook for recovery

Henry Harteveldt, President, Atmosphere Research Group, reports on the current state of play in the US aviation industry and keys to recovery post coronavirus

Aviation and COVID-19 state of play in the US

As the global aviation industry confronts an unprecedented state of disarray, the true impact of the coronavirus on airlines and the wider supply chain continues to unfold. At Cirium, we’re running 24/7 analysis of the trends without borders and the regional challenges and developments to identify both the projected timeline and vital keys for airline recovery.

The US$1.7 Trillion aviation market is a critical focus.

US airlines, like all others, have been irrevocably impacted by this worldwide event. But what are the unique markers for supply and demand and cash flow that inform the outlook for the US aviation market as we enter May 2020?

Henry Harteveldt, President at Atmosphere Research Group, recently presented on a World Aviation Festival webinar, Aviation and COVID-19 State of Play in USA – on April 7 2020 and Cirium’s data helped to provide some key data* for insights on the US market.  (*Cirium data since updated as per publication date of this article on May 7).

We’ve collated Harteveldt’s expert insights and the data you need to know now…

List of topics covered:

  • US demand
  • Government intervention
  • US fleet storage
  • US seat changes
  • American Airlines schedules
  • US airline cash flow
  • Post recovery investment
  • Recovery timeline in the US

Air travel passenger demand

— assessing the risk of unemployment and impact on recovery

As a key marker of predicted recovery in air travel passenger demand, Harteveldt shared research into the potential rates of unemployment in the USA which would, of course, impact household income – and all consumer decision making and purchasing behavior.

  • The key point is that until we have an effective virus treatment/vaccine, 20% of the US economy is at risk.
  • Millions of US citizens will be affected – 10M people have applied for unemployment benefits with more than 700,000 jobs reported to have been lost (as of April 7), and US Federal income may fall by 50% near term.
  • However, the good news from the aviation industry perspective is that, based on research from 2019, most US airline passengers – 54% – appear to have jobs that are at low risk of unemployment.

Most US airline passengers have low risk jobs

Source: Atmosphere Research Group presentation for World Aviation Festival, April 7 2020

 

  • Among business travellers, 72% have some type of professional job which is more likely to put them into low risk of unemployment.
  • 58% of leisure passengers have a professional job which puts them at low risk of unemployment.

US Passengers Above-Average salaries

Source: Atmosphere Research Group presentation for World Aviation Festival, April 7 202020

 

  • US air passengers tend to have an above average household income generally – US$63,179.
  • Business travelers average household income – US$105,125.
  • Leisure travelers – US$94,759.

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US Government intervention and financial support

The US CARES Act includes US$58bn in financial support for the US airline industry. This equates to US$50bn in cash and loans to US passenger airlines, US$4bn for cargo carriers and US$3bn for industry contractors. However, some of the terms are contentious with some ambiguous language.

  • Alaska, Allegiant, American, Delta, Hawaiian, JetBlue and United were the first seven airlines to apply on the priority filing deadline of April 5, 2020.
  • The terms are contentious as a result of ambiguity relating to the fact that the bill suggests that the government may request assets, equity and warranties in exchange for the cash and loans.

 

US fleet in storage

It comes as no surprise that unprecedented numbers of aircraft have been grounded in the US, but what does this look like for leading US airlines? Harteveldt commented on the minimal activity of the US carriers, those numbers have continued to change.

Note: Since this summary, there have been additional updates to the latest storage numbers.  As of May 7, 2020, Cirium data showed the in-service fleet has stabilized at approximately 10,300. For the latest updates maintained by the Cirium team, view our hibernation phase page.


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US airline Year-on-Year (YoY) seat changes

US airlines total YoY Domestic capacity -33%

Source: Atmosphere Research Group presenting Cirium analysis, April 7 2020

 

  • US Airlines’ Total YoY April/May Domestic Capacity: -33%; International -60%.
  • Schedule changes are happening daily.
  • Hawaiian and Spirit eliminated all their long-haul capacity and Hawaiian has cut almost everything else.
  • We are also seeing other airlines dramatically drop both domestic and international services.
  • Some good news: it’s interesting that, according to additional Cirium data (not visible in the chart above), Allegiant Air actually had a 7.3% increase. Go Allegiant!

 

Spotlight on American Airlines: Schedules May YoY

Drawing from the Schedule Mapper in Diio Mi by Cirium, the chart below shows American Airlines’ route network from 2019 versus what is currently in its schedule for 2020.

Source: Atmosphere Research Group presenting Cirium analysis, April 7 2020

 

  • This data was captured in April, but the route network could reduce further as we progress through the month of May.

 

Spotlight on US airline cash flow

Source: Atmosphere Research Group presentation for World Aviation Festival, April 7 2020

 

  • Data from Deutsche Bank shows that a lot of airlines have three or more months of operating cash on hand but looks can be deceiving.
  • If airlines are going to have to refund money to travelers as opposed to giving travel credits, that’s going to take a toll on cash flow.
  • Cash flow will be further impacted if airlines continue to operate flights without passengers or cargo.
  • So, we expect to see airlines continue to cull their schedules, ground more aircraft and go to their employees with programs to ease the cash burden.
  • Once they start to receive government financial support, including cash grants to employees, this will help but there are no guarantees that this will be enough to change the fortunes of some airlines.

Post recovery investment focus for airlines

All airlines will focus on areas that lead to recovery generation and efficiency. So-called soft areas of investment such as seats, uniforms, lounges and branding will not be in scope, at least not in the initial phases of recovery.

Priority investment areas:

  • Continuous pricing software – i.e. the software that helps airlines make money
  • Digital direct channels (primarily mobile)
  • Retailing/merchandising, including NDC
  • Biometrics
  • Customer data/personalization
  • Ancillary products
  • Lower-cost alternative payments
  • Co-brand credit card marketing.

 

Legacy of underinvestment in technology has resulted in greater challenges

It is vital to note that airlines were already underinvesting in technology prior to the pandemic.

  • Airlines invest in technology around 3-3.5% of revenues, versus other industries which invest around 4% or more of revenues.
  • Airlines’ technology departments often have around 50% more contractors than full-time staff and many of these contractors were let go when the crisis hit and airlines looked for ways to cut back.
  • We were already on the back foot – we’re now even further behind with a bigger technology gap which means many airlines will struggle.
  • Tech companies who sell technology, ancillary products and solutions will need to consider how they can make it as easy – and, of course, as inexpensive – as possible for airlines to install it, test it and operate it.

 

The estimated timelines for airline recovery in the US

  • The US airline industry will take 2+ years to recover with rate of recovery dependent on establishing consumer confidence.
  • Healthy airlines require a healthy – and confident – society plus a healthy economy.
  • While there is wide consensus that substantial numbers of consumers will be eager to resume their passion for leisure travel, and resume essential business travel, it’s hardly surprising that establishing confidence in health and safety measures implemented by airlines, airports and the whole hospitality industry is the number one criteria for consumers when considering booking a flight.
  • We can’t rush this – the health of the nation must come first.
  • Meaningful recover can and will not happen until public health policies/guidelines and medical care availability are in place – and effective treatments may lag.

 

Airlines should expect:

  • ‘Piecemeal’ geographic recovery. Some cities will recover faster than others depending on the criteria and actions taken to suppress the virus. Travelers will want to avoid places that have. not yet been declared safe. So, if an airline has a hub in a city or state that its still considered to be high risk. That hub may not be a viable connecting point for that carrier for the time being
  • Business travel recovery hinges on duty of care confidence.
  • Uneven leisure recovery based on consumers’ emotional and physical as well as financial health.

Source: Atmosphere Research Group presentation for World Aviation Festival, April 7 2020

 

For more industry insights, visit our COVID-19 overview page, or register for our latest webinar.

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Henry H. Harteveldt is one of the travel industry’s most respected analysts. He started the Atmosphere Research Group – a San Francisco-based independent, objective travel industry market research and strategic advisory firm – in 2011, following a nearly 12 year career as Forrester Research’s global head of travel research. Before becoming an analyst Henry spent more than 15 years in marketing, product, planning, PR, and distribution roles at a variety of leading travel firms, including Continental Airlines, Fairmont Hotel Management Company and GetThere. Harteveldt also sits on the Cirium On-Time Performance Review Board.

 

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