The Economist - USA (2021-07-10)

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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
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