If some airlines decide to exit the aviation market due to COVID-19, explain how the remaining airlines' economic profit (or loss) will change.

 

The ongoing COVID-19 pandemic has resulted in a full-scale crisis with the imposition of travel restrictions and suspension of flights in a global effort to contain the spread of the virus. Aviation, and in particular airports, have been brought to a virtual halt and the industry is in survival mode, crippled by the loss of traffic and revenues. As of 5 May 2020 it is estimated that a reduction of more than two billion passengers at the global level in the second quarter of 2020 and more than 4.6 billion passengers for all of 2020. Airports must continue to meet their capital expenses obligations as they remain characterised by predominantly high fixed costs necessary for maintaining and operating the infrastructure components of the airport, including runways, taxiways, aprons, parking stands and terminal buildings. The impact of COVID-19 has thus resulted in an existential threat to airports and to the aviation industry at large. As the impact of the coronavirus and multiple government travel reactions sweep through our world, many airlines have probably already been driven into technical bankruptcy, or are at least substantially in breach of debt covenants. But the post-coronavirus chaos will alternatively offer a unique opportunity to reframe the foundations of a global airline industry. COVID-19 experience could lead to a realignment in activity that is more consistent with broader social objectives. One example is the role that air cargo has played in facilitating the consumption of exotic fruit and vegetables in high income countries all year round. This concern has attracted research attention in the past. The forced re-structure of long-haul air services may change costs and so bring the planning of air freight services more into line with current thinking on sustainable economic development. Some survivors are self evident. Like Chinese airlines are mostly government-supported, so at least the majors will remain solvent; their share prices reflect this actual and de facto underwriting. Whereas many other major international airlines' prices have dropped by 50% and more, the big three Chinese airlines' shares have lost only a little more than 10%. The last thing the world needs post-coronavirus is a nationalistic aeropolitical confrontation. These remaining aviation companies will continue to survive through intergovernmental coordination. Now is the time to establish a new framework. Because failure to coordinate the future will result in protectionism and much less competition. Also because some aviation companies are closing, the survivors will maximize profit due to decrease in supply and service and will definitely gain back losses when everything else normalizes. That the market will be smaller, running out to at least 2022-2023, is in broad agreement. Economic slowdown and the need to rebuild passenger confidence are going to be dampeners on demand. More uncertain, unless an effective vaccine or cure for the virus is found relatively quickly, is the duration and impact of social distancing.

Market composition is another uncertainty, particularly the question of how much business-class traffic will return. Recession will hit demand, with business failures in multiple sectors of the economy, while survivors will keep corporate travel budgets in check through financial necessity. Advances in video conferencing that have led to broader adoption in recent months, will have a permanent negative impact on demand and also provide an excuse for many businesses to demonstrate their green credentials by cutting executive travel.

However, a structural reduction of business-class demand is probable and in the short term, airlines that have been reliant on this will have to accept some pricing pain to fill their fixed long-haul cabin capacities. Further ahead it is likely that aircraft configurations will need to change and business models revised to accommodate a reduction in average unit revenues. The bottom line is that airports are important engines of economic growth, wealth creation and employment. ACI pledges to support its members through the global crisis and to do its part in building a thriving and resilient aviation industry.