TheEconomistJuly10th 2021 Business 63
reckonsCitigroup,a bank.
In America,internalflights makeup
60%ofairtravel,comparedwitharound
10%inEurope,theMiddleEastandAfrica,
estimatesOliver Wyman, aconsultancy.
Thecountrystilllagsa littlebehindChina
butairtravelintherunuptotheFourthof
Julyweekendsurpassedprepandemiclev
els.InEurope,bycontrast,fragmentedas
thecontinentisbynationalborders,the
numberofshorthaulflightsisstill55%
belowwhatiswasbeforecovid19hit.
Westerlytailwinds
ScottKirby,bossofUnitedAirlinesHold
ings,haswarnedthattheAmericancarrier
needsabout65%ofprepandemicdemand
forbusinessandinternationallonghaul
tripsmerelytobreakeven.Still,thatlooks
achievableforUnitedanditsdomesticri
valssuchasAmericanAirlines,DeltaAir
LinesandSouthwest(whichpioneeredno
frillsflyinginthe1960sbuthasturnedinto
somethinglikea domesticnetworkairline,
minustheinternationallonghaul).
American,forexample,earnsaround
70%ofrevenuesfromdomesticpassen
gers, whereas fullservice carriers else
wheremightrelyonthebigseatsatthe
frontofintercontinentalflights for half
theirrevenues(andupto75%ofprofits).It
helpsthat yearsofconsolidationwaved
through by lighttouch regulators have
createdanoligopolywherethefourbigair
linesferry80%ofpassengers.
TheChinesemarketissimilarlycarved
upbetweena fewbigcarriers—AirChina,
ChinaSouthernandChinaEastern.Asa re
sult, their revenue per passengerkilo
metreistwicewhatitisinnearbySouth
EastAsia, where competition is fiercer.
WithChinesedomestictravelmoreorless
backtonormal,andtheircostlygeopoliti
calobligationstoexpandlossmakingin
ternationalroutesputonicebecauseofco
vid19,thetrioareina bettershapethan
everbefore.
The domestic rebound and growing
confidencehavehelpedAmericanandChi
neseairlinesraisecashandavoidprotract
edstatesupport. OfthebigChineseones
onlyChinaEasternrequireda substantial
bailout.The Americanfirmsgotahuge
bailoutbutareexitingit quickly.InMarch
AmericanAirlinestappedthemarketfor
$10bnindebt,mostofwhichwentonre
payinggovernmentloans.Amonthlater
Unitedraised$9bnwitha similargoal.
Importantly,theAmericancompanies
haveavoidedtheneedtosellequitystakes
toUncleSam.Combinedwithstrongdo
mesticcashflows,anearlyexitfromgov
ernmentprogrammesgivestheAmerican
andChinesecarriersa competitiveadvan
tage, says Andrew Charlton of Aviation
Advocacy,a consultancy.InEurope,mean
while,FrancehasincreaseditsstakeinAir
Franceklmtonearly30%, Germanyhas
takena20%stakeinLufthansaandthe
everhopelessAlitaliaisnowfullystate
owned.EvenasthethreeEuropeanfirms
continuetoretrench,whiledealingwith
growing state involvement, United Air
lineshasjustplacedanorderfor 270 new
jets,itsbiggestever.DeltaandSouthwest
havealsobeenbuyingaircraft.
Thereturnofshorthaulinternational
travelwillrevivethefortunesofthesecond
group of winners: lowcost carriers in
highly vaccinated places, where borders
are gradually reopening and quarantine
rulesarebeingrelaxed.Europeancompa
nies inparticular standto benefitfrom
pentupdemandforholidaysandvisitsto
familiesandfriends.Morethaneightin
tenpassengersflyingwithRyanair,anIrish
nofrillsairline,andWizzAir,a Hungarian
one,areleisureseekers, comparedwithno
morethansevenintenforLufthansaand
AirFranceklm.
Thelackofa Europeanoligopoly,and
deeppandemicinducedcutstotheshort
haulnetworksoflegacycarriers,haveleft
room for thrifty challengers to expand.
Bernstein, abroker,expectsRyanairand
WizzAir,whichhavelittledebtandlotsof
cash to spend onnew planes, to outfly
Europeanrivalsinthenextfewyears.Sodo
investors.BothRyanairandWizzAirare
worthmorethanbeforethepandemic.
Someofthelikelywinnersmaystum
ble.DeltaandUnitedhavesomewaytogo
before they regain their prepandemic
marketcapitalisations.A fewothervictors
mayemerge.Oneimprobablecandidate,
accordingtoBernstein,istheunlovedBrit
ish Airways. Its parent company, iag,
movedswiftlytoslashcosts,retireolder
andthirstieraircraft,delaydeliveriesof
newplanesandreturnleasedaircraftwith
lotsofunwantedpremiumseats.Itispos
siblethatnetworkcompanieswithpass
ablefinancesanda goodrecord,likeSinga
pore Airlines, could eventually fly high
againonceinternationaltravelresumes.
OnJuly5tha consortiumofinvestorsbet
thatlonghaulflying wouldreviveintime,
byofferingtopay$17bnforSydneyAirport,
Australia’sgatewaytotheworld,nottoofar
belowitsstockmarketvalueinlate2019.
Challengercarrierscouldspringa sur
priseinAmerica,wherethethreethriftiest
ones—Allegiant,FrontierandSpirit—have
doubledtheirmarketshareto10%inthe
pastfiveyearsandtogetherlostlessthan
$1bnin2020,comparedwith $45bnfor
American carriers all told, according to
Keith McMullan of Aviation Strategy, a
consultancy. JetBlue, another American
lowcostairline,planstointroducetrans
atlanticflightsonlongrangenarrowbody
jetsthatarefarcheaperto operatethan
widebodiesthattypicallyplysuchroutes.
Despitethefogofuncertainty,someup
startsarerollingoutofthehangar.Breeze,
whichfliesbetweensmallerAmericancit
iesoverlookedbyothercarriers,andAvelo,
whichbringstouriststoCalifornia,aretak
ingadvantageofcheapaircraft,plentiful
pilotsandavailableslotsatoncecrowded
airports. Catching up with highflying
American and Chinese oligopolists, or
with the cheap and cheerful European
firms,isnotimpossible.Butitwilltake
skilfulpiloting.n
Jabs and journeys
Selected countries
Sources:IATA;OurWorldinData *AtJuly5th 2021 orlatest
3
160140120100806040200
Covid-19,vaccinationdosesper 100 people*
Domesticairpassengers as % of total, 019
100
80
60
40
20
0
Taiwan
HongKong
Thailand
Malaysia
Vietnam
Japan
India
Indonesia China
NewZealand
Australia
Russia
Tu r ke y
Netherlands
Greece Spain Britain
France
Italy Germany
SaudiArabia
UAE
Mexico
Brazil
United States
Canada
Asia Europe Middle East Americas
Unfit to fly
Source:IATA *Full-serviceandlow-costcarriersforwhichdataareavailable †Returnoninvestmentlesscost of capital
Airlines,1=mostprofitable
Airlines*rankedbyeconomicprofits/losses†
201,$bn
2
1
0
-1
-2
-3
736050403020101
10
8
6
4
2
0
1996 2000 05 10 1815
Airline-industry* returns and cost of capital
%
Return on
invested capital
Weighted average
cost of capital