Airlines Are Looking To Relaunch

The airline industry is used to some level of guesswork, even in good times. No one really knows how demand will evolve, whether a new route will actually perform according to expectations or what the response by competitors will be. No matter how analytical the approach is, no matter how experienced the network planning department, some experiments will always fail.

In good times, airlines typically have the financial wherewithal to deal with some level of underperforming markets. But now, as the industry takes its first steps to emerge from an unheard-of crisis, it faces the worst possible combination: There is no financial margin left for wrong bets on capacity, pricing and network rebuilding, and the uncertainty about when, where and how demand might return is greater than ever.

Only over the past few weeks have some encouraging signs begun to emerge on a broader scale, probably good enough to call the short-term trend a recovery, but not good enough to call it stable upward development. And even as traffic begins to slowly come back, airlines will soon face the winter season, when most carriers lose money even when business is booming.

Southwest Airlines will have a natural advantage over their competitors with larger international networks. Prior to the pandemic, Southwest deployed roughly 5% of capacity outside the country, compared to full-service carriers that devote as much as 40% of their capacity to international flying in normal years.

Southwest expects to operate at nearly flat year-over-year capacity by year-end, indicating an aggressive strategy to capitalize on its domestic network and low-cost structure during the COVID-19 recovery.

Allegiant Air and Spirit Airlines are both targeting nearly flat levels by year-end, while Frontier Airlines is aiming for 80-90%. Ultra-low-cost carriers (ULCC) believe their domestic leisure focus and low operating costs will allow them to grow aggressively during the recovery period, a scenario reminiscent of the years following the 2008 financial crisis, when they expanded while network carriers adhered to strict capacity discipline.

ULCCs such as Allegiant and Sun Country Airlines will also benefit from low-priced used aircraft. The CEOs of both companies have said they will use them to source fleet growth and spare parts for their Airbus A320 and Boeing 737 fleets, respectively.

With demand for air travel tied closely to a country’s economic situation, however, airlines are also going to have to make huge concessions on profitability and the all-important ancillary revenues by luring in wary consumers with low prices. It is a message the region’s LCCs have already taken to heart. EasyJet said it was launching its biggest summer sale ever as it mapped out the partial resumption of its schedule, with over 1 million flights starting at £29.99 ($38), highlighting the intense pricing pressure it and its peers are facing.

EasyJet has said it expects to be operating at about 30% of its normal pre-COVID-19 capacity in the fourth quarter of its financial year, which runs through the end of September.

The Hong Kong and Singapore governments have allowed transit flights to resume, which will put SIA and Cathay Pacific in a good position to take advantage of global markets as they reopen.

However, international recovery has been more sluggish in the Asia-Pacific region, which is relatively fragmented due to the vast number of countries and a relative lack of intraregional authorities.

While the rapid recovery of domestic markets is likely to continue through the year as internal restrictions eased, it is cold comfort to airlines such as Cathay Pacific and SIA that do not have domestic networks.