Numbers Don’t Lie
By Andrew J. Masigan
Commercial aviation is the pandemic’s most severely affected industry in terms of gross losses. Unfortunately, our very own Philippine Airlines (PAL) and Cebu Pacific were among those who suffered the brunt of the carnage. PAL Holding posted a massive loss of P73 billion in 2020 followed by another loss of P16.6 billion in the first half of 2021. Last month, the flag carrier filed for Chapter 11 bankruptcy in the United States to gain creditors protection and the legal basis to restructure its debts. Filing bankruptcy will also give it leverage to re-negotiate aircraft leases. For its part, Cebu Pacific posted a loss of P20.8 billion last year and another P13.8 billion in the first half of 2021.
Unlike Singapore Airlines, Malaysian Airlines, Garuda Indonesia, Vietnam Air, and Thai Airways, all of whom received financial bailouts from their respective governments, PAL and Cebu Pacific received no financial aid from the Philippine government despite their crucial role in national security, trade, tourism, social security, and national logistics. Both must survive on the back of their own resources. This is why the Philippine carriers had to undergo a comprehensive restructuring.
About 12,000 Filipinos rely on PAL and Cebu Pacific for their livelihood. Of this number, 40% have already been retrenched, retired, or put on furlough.
PAL and Cebu Pacific mirror the trends in the international airline industry. Last year, airline revenues worldwide dropped to just $328 billion, from $820 billion in 2019. For perspective, the revenues generated last year were about the same as it was in the year 2000. Analysts forecast that the industry will only recover to 2019 levels by 2025.
Like most other industries, COVID-19 changed the competitive landscape of the airline industry. It has also changed the way people fly. What can we expect from the aviation industry as we move forward?
According to Changi Airport Consultants of Singapore, there will be a new obsession towards sanitation and disinfection. We will see dark floor carpets giving way to white marble flooring or slate tiles to better see dirt and grime. We will also see mandatory hand disinfection in every touch point, UV disinfection lamps in the luggage conveyors as well as testing and vaccination centers as a permanent fixture in airports. Contactless check-in, immigration, and customs processes will become the new normal.
In terms of passenger volume, analysts estimate that only 80% of business travel will recover by 2024 due to the prevalence of remote working. Leisure trips and family visits will fuel the recovery in the next three years. The downside is that most leisure travelers fly economy and usually purchase heavily discounted tickets. Airlines that rely on business travelers (those who book flights on Business Class, pay a premium for direct flights and last-minute bookings) will continue to experience losses per flights.
This will compel airlines to restructure the economics of their fleets and destination networks. Whereas in pre-COVID years, airlines maintained several flights between hubs using small wide-bodied aircrafts like the Boeing 787, the subdued demand will compel airlines to lessen their frequencies but use larger aircrafts like the A350 or Boeing 777.
Airlines will also reconfigure the layout of their cabins to address the reduction in business passengers and increase leisure passengers. At the simplest level, lower business-class demand may warrant smaller business-class cabins.
The flying public can expect higher ticket prices too. Many airlines have had to borrow huge sums of money to stay afloat and cope with high daily cash burn rates, PAL and Cebu Pacific included. The industry amassed a staggering $180 billion in debt in 2020 alone, which represents half of the industry’s revenues. These costs will need to be recouped and higher ticket prices is one of the ways airlines will do it.
The pressure on price is exacerbated by demand exceeding supply. Last year, large chunks of airline’s fleet were either retired or returned to their manufacturer or lessor. Many airlines cancelled orders of new aircrafts. There are substantially less air seats available today than there were two years ago. It will take some time before supply of air-seats meets the demand.
The few airlines in good financial position will take advantage of the supply glut to acquire (or lease) new aircrafts. See, prior to COVID, aircraft manufacturers ramped up production in anticipation of continued growth. When COVID hit, orders were cancelled by the hundreds while hundreds more planes were returned to their manufacturers. Brand new or slightly used aircraft can be had for deep discounts. In fact, PAL recently sold one of its A350s to Lufthansa. For those leasing, the monthly rate of a 2016 Boeing 777-300ER aircraft was around $1.2 million in 2019. It now goes for less than $800,000.
Demand for air freight services will continue to increase. Before the pandemic, cargo typically made up 12% of the sector’s total revenue. However, with e-commerce coming into the mainstream, demand for airfreight has increased three-fold. Cargo space has been scarce and this allowed carriers to charge a premium for airfreight. A recent survey showed that cargo revenue accounted for 49% of total airline revenues last year.
In response to the high demand and low supply of air freight, carriers are now looking into boosting their cargo capacities by converting some of their aircrafts into “preighters” or passenger airplanes that are used to transport cargo. This will become a growing trend in the industry, especially since most airlines have already reduced their fleets.
The circumstances of the airline industry have changed dramatically. Carriers need to be agile to survive. Although tourism is slowly normalizing in certain parts of the world with vaccinations ramped-up, still, the road to recovery is three years away. At least the worst is over and things can only improve from here.
There is a silver lining at the end of all this. Air travel will become greener and more efficient since inefficient aircrafts have been forced into retirement. More importantly, airlines that survive the carnage will emerge leaner, meaner, and more profitable. This includes our very own Philippine Airlines and Cebu Pacific.
Andrew J. Masigan is an economist