The Economist - USA (2021-07-10)

TheEconomistJuly10th 2021 Business 63

reckonsCitigroup,a bank.
In America,internalflights makeup
60%ofairtravel,comparedwitharound
10%inEurope,theMiddleEastandAfrica,
estimatesOliver Wyman, aconsultancy.
Thecountrystilllagsa littlebehindChina
butairtravelintherun­uptotheFourthof
Julyweekendsurpassedpre­pandemiclev­
els.InEurope,bycontrast,fragmentedas
thecontinentisbynationalborders,the
numberofshort­haulflightsisstill55%
belowwhatiswasbeforecovid­19hit.

Westerlytailwinds

ScottKirby,bossofUnitedAirlinesHold­

ings,haswarnedthattheAmericancarrier

needsabout65%ofpre­pandemicdemand

forbusinessandinternationallong­haul

tripsmerelytobreakeven.Still,thatlooks

achievableforUnitedanditsdomesticri­

valssuchasAmericanAirlines,DeltaAir

LinesandSouthwest(whichpioneeredno­

frillsflyinginthe1960sbuthasturnedinto

somethinglikea domesticnetworkairline,

minustheinternationallong­haul).

American,forexample,earnsaround

70%ofrevenuesfromdomesticpassen­

gers, whereas full­service carriers else­

wheremightrelyonthebigseatsatthe

frontofintercontinentalflights for half

theirrevenues(andupto75%ofprofits).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 fiercer.

WithChinesedomestictravelmoreorless

backtonormal,andtheircostlygeopoliti­

calobligationstoexpandloss­makingin­

ternationalroutesputonicebecauseofco­

vid­19,thetrioareina bettershapethan

everbefore.

The domestic rebound and growing

confidencehavehelpedAmericanandChi­

neseairlinesraisecashandavoidprotract­

edstatesupport. OfthebigChineseones

onlyChinaEasternrequireda substantial

bail­out.The Americanfirmsgotahuge

bail­outbutareexitingit quickly.InMarch

AmericanAirlinestappedthemarketfor

$10bnindebt,mostofwhichwentonre­

payinggovernmentloans.Amonthlater

Unitedraised$9bnwitha similargoal.

Importantly,theAmericancompanies

haveavoidedtheneedtosellequitystakes

toUncleSam.Combinedwithstrongdo­

mesticcashflows,anearlyexitfromgov­

ernmentprogrammesgivestheAmerican

andChinesecarriersa competitiveadvan­

tage, says Andrew Charlton of Aviation

Advocacy,a consultancy.InEurope,mean­

while,FrancehasincreaseditsstakeinAir

France­klmtonearly30%, Germanyhas

takena20%stakeinLufthansaandthe

ever­hopelessAlitaliaisnowfullystate­

owned.EvenasthethreeEuropeanfirms

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 benefitfrom

pent­updemandforholidaysandvisitsto

familiesandfriends.Morethaneightin

tenpassengersflyingwithRyanair,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 outfly

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

ablefinancesanda goodrecord,likeSinga­

pore Airlines, could eventually fly high

againonceinternationaltravelresumes.

OnJuly5tha consortiumofinvestorsbet

thatlong­haulflying wouldreviveintime,

byofferingtopay$17bnforSydneyAirport,

Australia’sgatewaytotheworld,nottoofar

belowitsstockmarketvalueinlate2019.

Challengercarrierscouldspringa sur­

priseinAmerica,wherethethreethriftiest

ones—Allegiant,FrontierandSpirit—have

doubledtheirmarketshareto10%inthe

pastfiveyearsandtogetherlostlessthan

$1bnin2020,comparedwith $45bnfor

American carriers all told, according to

Keith McMullan of Aviation Strategy, a

consultancy. JetBlue, another American

low­costairline,planstointroducetrans­

atlanticflightsonlong­rangenarrow­body

jetsthatarefarcheaperto operatethan

wide­bodiesthattypicallyplysuchroutes.

Despitethefogofuncertainty,someup­

startsarerollingoutofthehangar.Breeze,

whichfliesbetweensmallerAmericancit­

iesoverlookedbyothercarriers,andAvelo,

whichbringstouriststoCalifornia,aretak­

ingadvantageofcheapaircraft,plentiful

pilotsandavailableslotsatonce­crowded

airports. Catching up with high­flying

American and Chinese oligopolists, or

with the cheap and cheerful European

firms,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