Deregulation | Free For All
During the jet set era of the 1960s regulation made it possible for only the well-heeled to travel. Airline deregulation in the early 1980s heralded in a new era enabling the “salt of the earth” to fly to cities, especially overseas, at affordable prices. Airline competition then heated up “melting” ticket prices with domestic flights almost as competitive as the taxi fare to the airport itself.
Pandemic Fallout | Grounded
Deregulation endures yet the economic fundamentals – market forces – dictate prices. Airlines are permanently retiring aircraft, mostly older less fuel-efficient models, and keeping the newer more efficient ones, while placing a hold on new purchases. Furthermore unprofitable or marginally profitable routes will be eliminated making it a seller’s market to the tune of; “my way or the highway” or is it “runway”?
The following chart 22 May 2020 provided by UNWTO (United Nations World Tourism Organization) entitled Global Tourism to Suffer Crushing Blow in 2020 and presented by Statista, an online German statistical firm, shows the projection for tourism demand destruction.
For this reason air traffic has dropped considerably as shown in the following chart dated 31 March 2020 entitled Covid-19: Unprecedented Decline in Air Traffic provided by Flighttrader24, an air tracking service, and presented by Statista.
This leads into the inevitable massive financial losses as depicted in the following chart 6 March 2020 entitled Airlines Could Lose $100+ Billion Due to Coronavirus provided by IATA (International Air Transport Association) and presented by Statista:
The Future of Air Travel | Into The Wild Blue Yonder
The new business structure for the business or leisure traveler will conjure a new aura of elitism coming full circle back to the jet set era. Because the global economic recovery will be modest and fall far short of pre-pandemic levels, air travel will become a luxury to most even for domestic travel.
The immediate and post-pandemic business model will feature fewer airlines operating at far less capacity with fewer passengers. In a tumultuous economic era demand will be unstable and unpredictable forcing cash-strapped airlines to be justifiably ultra-conservative how they restart their business.
The following are additional operational and financial challenges for airlines:
· Bankruptcies: Multiple airlines worldwide will face bankruptcies and liquidations - a total operational and financial restructuring of the industry operationally.
· Pilot Demographics: There will be a permanent furlough of pilots far more pilots than operational aircraft and the new pilots will be hired at far lower salaries than the low salaries they receive now. The pre-pandemic demographics heavily favored younger pilots because the ones about to retired exceeded younger pilots. However because of far less demand and aircraft in service, younger pilots may be scrambling to secure employment.
· Pilot Flying Currency: Not only have aircraft been mothballed but the media has forgotten the pilots who are furloughed and haven’t been in an actual cockpit in months, more than likely on simulators.
· White Elephants: The recently expended or constructed airports could be the new white elephants designed for the pre-pandemic era which now have excess capacity.
· Cheap Fuel: The upside is that fuel prices, a major airline cost component, will remain low so operational costs will be manageable.
The trend of fewer aircraft orders occurred merely weeks before the emergence of the pandemic and is already accelerating the cancellation of orders. The projected future impact is evident in this chart dated 30 October 2019 entitled Turbulent Times for Commercial Aircraft Orders provided by Boeing, Airbus and presented by Statista.
Leisure & Hospitality
High unemployment will continue and even the employed are fearful about keeping their jobs. For this reason air travel is already a luxury with more vacations taking place regionally by car, train or auto. Air travel will be affordable for the well-healed akin to the throwback 1960s jet set of rock stars, movie celebrities and the wealthy. It will be full price with full service as airlines retool their business model to serve them.
There will be far fewer business travelers particularly with the upgrade of teleconferencing software that will offset the necessity and expense of travel as only senior management will travel to key events such as annual industry conferences and visit major customers.
Whether for business or pleasure the proverbial “time and money” factor there will be strong consideration to justify travel to smaller cities. From a cost perspective airlines may reduce or even eliminate connections to smaller regional airports from major hubs. This will necessitate alternate non-air travel arrangements via bus or train which means longer and more expensive trips.
A beneficiary of this chaos may be the corporate jet sector. A business can conduct a cost/benefit analysis based on required annual travel and level of urgency, with flexibility. Its choices include one or more of a combination of buying, leasing, chartering or fractional ownership. The corporate business sector already has long-range, large private jets that matches, and sometimes exceeds, those in first-class of large commercial aircraft.
With respect to an investor, although there is still much uncertainty in the transportation field, a cautious foray today with progressive additional investments in this field may pay off handsomely by late 2021 by which time a vaccine will have been developed and possibly in the process of distribution.
Investment considerations should be an industry-specific index rather than company-specific because of the inevitable and unpredictable shakeout such as the U.S. Global Jets ETF (JETS) and Dow Jones U.S. Airline Index (DJUSAR).
Copyright 2020 Indo-Brazilian Associates LLC.
Indo-Brazilian Associates LLC is a NYC-based think-tank and advisory service that provides beyond-the-horizon contrarian perspectives and risk assessments on energy investments, geopolitical dynamics and global urban security.