While airlines around the world have suffered profound damage from the pandemic over the past 16 months, U.S. carriers largely see the middle of 2021 as an inflection point as vaccination rates gradually increase and a population beset by Covid fatigue pines for a break from social restrictions. For an industry that has undergone a permanent structural change following record financial losses, returning to some semblance of normalcy—at least in the leisure market—would mark the beginning of the end of the worst downturn it has ever endured.
While leisure markets have shown signs of recovery, particularly in the U.S., business travel remains severely depressed due to several factors, including international border restrictions and deep travel budget cuts by companies that have found teleconferencing an acceptable alternative to in-person meetings.
“It was a deeper crisis than we expected, and a big part of that was the complete evaporation of corporate travel,” Airlines for America (A4A) vice president and chief economist John Heimlich told AIN. “Some of it is clearly the fiscal savings that some of these companies have enjoyed, but it's also an issue of international business travel, including U.S.-Canada and transoceanic, which has been restricted. If you can go, oftentimes it's a 14-day quarantine that's required and so that's a nonstarter.”
Above all, Heimlich called for “visibility” and a “clear path” out of the muddle of Covid travel rules between jurisdictions. In early May A4A called for a plan to reopen air travel between the U.S. and the UK through a protocol that could amount to a travel bubble similar to that established between Singapore and Hong Kong, for example, by the start of the G7 Summit on June 11. Around the same time, the European Commission recommended easing restrictions on non-essential travel from outside the EU and allowing entry into the 27-member-state bloc for fully vaccinated foreign citizens and non-residents.
Downturn Lasting Longer than Expected
Heimlich also noted that the downturn has proved longer than originally anticipated. While A4A’s optimistic projection showed January 2021 as the first month in which the pandemic would not negatively affect revenues, it now appears its pessimistic projection of June 2022 will prove far more accurate, mainly due to the slow revival of business travel.
“It certainly hasn't been quick, but we do expect to see some kind of tangible recovery of corporate travel after Labor Day [September 6],” said Heimlich. “And that all comes down to vaccination rates…U.S. travel agency bookings have been down 85 to 90 percent for many, many months. And now we’re seeing something closer to down 65 percent. But I think we’ll start seeing a better pace of improvement in the fall.”
A4A’s projections for leisure travel look far more optimistic, particularly as the summer vacation season approaches. Robust demand to one market that actually saw an increase in bookings in April this year compared with two years ago—the U.S. Virgin Islands—suggests a positive outlook for beach destinations in Southern California and Florida in the summer, as ocean waters get warmer, said Heimlich.
Meanwhile, by the spring, travel between the U.S. and Latin America already had seen more substantial improvement. U.S.-Mexico traffic, in particular, has outperformed U.S. domestic traffic in terms of current volume relative to pre-pandemic levels, according to A4A statistics.
Still, airlines that serve countries with large domestic markets fared better than those serving mainly international destinations. For example, Chinese domestic traffic has virtually recovered from the pandemic, while U.S. carriers have relied on recuperating domestic markets to help compensate for the paucity of cross-border traffic.
“We’re very fortunate that we have a large domestic market, so that’s one big difference,” said Heimlich in reference to the relative strength of U.S. airlines. “The Chinese carriers [also] benefit from a large domestic air travel market. To some extent that is true in Australia and New Zealand…[Another factor centered on] the different degrees and forms of government support…The Canadian carriers and airports had almost no support.”
Heimlich called the situation in Europe “somewhat uneven” due to the differences between government responses among various countries. “Those carriers had to park an inordinate number of airplanes and lay off an inordinate number of workers,” he said. “[The U.S. carriers] did not have to take such extreme measures. I think it also made it a little easier for us to access the capital markets.”
Globally, though, Heimlich conceded that the pandemic fundamentally and permanently changed the structure of the industry. He cited the retirements of a major portion of the largest widebodies in international markets and a more pronounced reduction in twin-aisle jets compared with single-aisle types in domestic markets.
In the U.S., the new competitive environment has favored low-cost and ultra-low-cost carriers with a shift toward leisure travel and the downsizing of global network carriers, which before the pandemic competed more aggressively in those markets. Examples of new LCC entrants include Burbank, California-based Boeing 737 operator Avelo, which started operations on April 28, and David Neeleman’s Breeze Airways, which began flying on May 27. Separately, Frontier Airlines and Sun Country Airlines both went public in March and continue to expand, noted Heimlich.
“I’m not necessarily saying the pandemic made that possible, but I do think it created more opportunities for those carriers,” he explained. “It freed up gates; it freed up markets to serve…The ultra-low-cost carriers will be the quickest to return to positive cash flow. And their low costs are better suited to the current low-fare environment.”