The Economist - USA (2021-02-13)

The EconomistFebruary 13th 2021 Special reportThe future of travel 5

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Avianca, based in Latin America, have gone to the wall.

Two types of carrier have the best chance of survival. Those

with sound business models and strong balance-sheets, such as

Ryanair in Europe, Southwest in America and AirAsia, are all low-

cost carriers ready for a rebound. And legacy carriers, mostly

propped up by governments, will keep their grip on long-haul fly-

ing when it returns.

Subsidies, subsidies

Support for airlines has been prodigious. Governments are used to

helping airlines for reasons of national pride and to maintain in-

ternational connections. Many countries in the Middle East, India

and Africa cling to ownership of loss-making national carriers.

Others are just returning to the orbit of governments. Bruno Le

Maire, France’s finance minister, has promised to “do what is nec-

essary to guarantee the survival of Air France”. Germany’s Luft-

hansa has had a bumper aid package. America’s airlines, never shy

to extend an upturned palm, benefited handsomely from its cares

stimulus act, signed into law in March 2020, which set aside $25bn

in grants for airlines and the same in loans and guarantees.

The result will be an industry wallowing in debt and beholden

once again to the state. Aviation Strategy, a consultancy, puts the

total in 2020 of government support plus loans from banks, other

investors and aircraft-leasing companies at $600bn, an increase of

$170bn since the end of 2019. Keith McMullen, a partner at the con-

sultancy, points out that most government aid has come in the

form of loans, the terms of which incentivise rapid repayment. But

the fragile state of the industry will make that tricky. European

governments may then be obliged to swap debt for equity.

A return to the days before deregulation and the rise of low-cost

carriers, when governments controlled national flag-carriers, set

(high) fares and decided routes based on national goals rather than

demand, is the fear of Andrew Charlton of Aviation Advocacy, an-

other consultancy. America’s big carriers, Asian giants such as Sin-

gapore Airlines, and Lufthansa and Air France-klmmay be subject

to government meddling. The terms of bail-outs for Air France

stipulate that it must no longer compete with high-speed rail on

some routes; Lufthansa’s decide what planes it may purchase.

That could give the low-cost carriers an

advantage. Michael O’Leary, boss of Ryan-

air, admits to mixed feelings about state

aid. Although it is “hugely distorting”, it is

also likely to “sustain high-cost employ-

ment”, he says. And high-cost competitors

are what he and his kind thrive on. Legacy

airlines, already having to compete harder

on short-haul routes and often weighed

down by heavy pension-fund deficits,

could struggle to adapt to an uncertain fu-

ture that will require flexibility and nim-

bleness as well as lower costs.

Moreover, legacy carriers rely especially

heavily on lucrative business travellers, a

sector that may never recover fully, to sub-

sidise seats at the back of the plane. If busi-

ness customers and feeder routes dwindle,

the complex web of domestic and interna-

tional flights becomes harder to sustain,

reducing connections and forcing up long-

haul prices.

Not all will suffer. British Airways has

slashed costs and raised capital and is fast-

tracking its previous restructuring effort to

compete with low-cost rivals. Other mod-

els look riskier. The Gulf carriers—Emir-

ates, Etihad and Qatar Airways—that have grown swiftly in recent

years may struggle. They lack a large domestic market to fall back

on, unlike their Chinese competitors, and passengers may prefer

not to mix with people from all over the world as they change

planes at vast airports in the Gulf. If their model falters, the sky will

be clearer for China’s state-controlled behemoths, which are al-

ready eating away at long-haul routes.

Low-cost carriers such as Ryanair and Wizz Air, based in east-

ern Europe, sniff opportunities. Mr O’Leary has promised to slash

fares to rekindle his business. His ability to compete with airlines

under the heavy hand of the state will be helped by several factors.

The availability of bargains from embattled planemakers and leas-

ing companies will help carriers in decent health or with new busi-

ness models. Ryanair confirmed an order for another 75 Boeing

737 maxsin December, taking its total to 210. The plane’s grounding

after two fatal crashes had led to cancelled orders, so a big vote of

confidence from Ryanair was surely worth a hefty discount. Wizz

Air, which relies on more robust parts of the market such as youn-

ger flyers and east Europeans going west for work and returning to

Still lumbering, but where are the passengers?

Up and then down

Worldwide revenuepassengerkilometresflown,trn

Sources:IATA;ICAO

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