The airline consultancy managing director talks about how liquidity is the key strategic commodity for airlines to keep their heads above water through the crisis.
This interview is part of Air Transport Month, a detailed examination of the future of the air transport industry as we begin to climb out of the COVID-19 crisis.
Below is a rush transcript of Victoria Moores' conversation with Patrick Edmond.
Victoria Moores: Good morning, my name is Victoria Moores and I'm European Bureau Chief with Air Transport World and with me this morning is Patrick Edmond, who is the managing director of Altair Advisory. Good morning, Patrick
Patrick Edmond: Morning Victoria, nice to talk to you.
Victoria Moores: Good to see you again. Patrick, obviously the topic of the moment is COVID, we've heard a lot of commentators talking about the situation, what's going on in the industry. I was wondering whether or not you have a feel for whether we've seen the worst of it yet, or whether things could get worse still.
Patrick Edmond: That's a cheery question to start with, isn’t it. I think we've seen the worst in the sense that the downturn, the shutdown in capacity has happened and that's not going to get an awful lot worse, but there comes a point where you're banging your head repeatedly off a wall and you can ask the question, "Okay, is it any better, have we seen the worst yet?" The difficulty is the longer this goes on the harder it is to recover from. So, it's like somebody who's swimming under water and they expect to have to hold their breath for 30 seconds, and let's apply that to the current situation.
The airlines were swimming under water, expecting to have to hold their breath…maybe if you'd ask them at the beginning of the summer, they would've said “until the end of the summer, until the start of the winter schedules, things should be getting better.” But all of a sudden you've got a memo while swimming under water, if you can imagine that, and it says, "No sorry, you've got to hold your breath for twice as long." And I think that's the difficulty now that we see airlines going into the Northern winter season. Normally, they would have a little bit - like bears eating salmon and preparing for hibernation - they would have banked their profits and their cash from the summer season to get them through the lean winter. Now they're heading into that lean winter, and it's a very, very lean winter without any of these reserves.
So I think we're going to see things getting progressively grimmer in terms of airline failures and airline crises over the coming months, even if the worst of the high-profile lockdowns and health crises are perhaps behind us. As we see, COVID is continuing along and until such time as there's a vaccine and a widespread vaccine, we won't see anything like a normal resumption, or a halfway normal resumption of air traffic.
Victoria Moores: Mm-hmm (affirmative). You mentioned there about the prospect of further failures within the industry. Are there any airlines that you would sort of pick out as being ones to watch specifically at the moment?
Patrick Edmond: I don't really like casting aspersions on anybody at the moment, but I think the dominant factor that's going to determine an airline's ability to get through at the moment is simply its cash reserves, almost more so than its business model or anything else, because traffic and revenue is so incredibly low, it's just about how much do you have in the piggy bank that will allow you to get through. And you have to also hope that your market will still be there when people are flying again. So, in that context, when I see announcements like Wizz Air opening a Norwegian domestic network, I think if I were an existing Norwegian incumbent, I'd be feeling a bit insecure about that, as one example.
Victoria Moores: And you're talking about liquidity there and obviously Wizz Air has gone very public with the strength of its liquidity. Are there any other airlines that you see out there that do have that rare commodity of strong liquidity at the moment, any others beyond Wizz?
Patrick Edmond: Well, I suppose, they used to say in terms of people going to job interviews, that the secret of success was sincerity. And if you could fake that, then you'd have it made. So, it's a bit like that with liquidity, if you can fake the liquidity. And what I mean by that is, either you're a private sector airline with very strong liquidity, or you are a too big to fail flag carrier whose national government is prepared to bail you out for national prestige reasons. So either you have that internal liquidity, or you have friends in powerful places. And I think those are the airlines that we'll see getting through this the best. And unfortunately that means that the weaker carriers, in many cases, are those who may fulfill a very important social role, or economic role. For example, regional airlines connecting remote regions, but who are not too big to fail and who are perhaps not state owned. So, I think there's a risk of social and economic fallout from airline failures in that respect.
Victoria Moores: So, in terms of the action that we're seeing, it's going to be the airlines that have the strongest liquidity, or are too big to fail, typically that we're going to see continuing, but a real battle for those independents that might not have that same size and scale independently.
Patrick Edmond: Yes, I think so. And in our context, I see some of the carriers that are, for example are state backed. And I'm thinking about some of those outside Europe, are using the opportunity to keep operating and keep their networks going to a greater extent than perhaps the underlying traffic would justify, because they see this as a way of staking out territory, staking out markets for a subsequent recovery. So, airlines are falling into a couple of different groups, there are those who are keeping their heads down and just trying to - a little bit like the hibernating bears - trying to conserve energy for as long as possible. And there are others who have the ability or perhaps the luxury to say, "Let's think about how we reconfigure ourselves. Let's think about how we make ourselves as ready as possible to grab market share and to optimize our revenue once passengers start coming back."
Victoria Moores: It feels as though basically we're still waiting for the prospect of summer 2020 that never came. So that's been just pushed back and who knows when that's going to come back?
Patrick Edmond: That's right, so it's a little bit like all these major sporting events that have been put off. It may be that IATA manages to reschedule summer 2020 for end of March 2024 instead, because there's nothing else in the calendar for then. So we can hope, but the trouble is that this is a waiting game and airlines, operations people will tell you that the worst kind of delay, or the worst kind of disruption, is a rolling delay. If they're told that the departing flight is delayed by an hour, because there's a slot delay of an hour, they can deal with that. If they're told that it's delayed probably by an hour, but after 45 minutes, it turns out delayed by another hour and then by another hour, you run into all kinds of problems with passengers missing connections, crew going out of hours and so on. And this is effectively a calendar-scale, rolling delay. Nobody knows when it's going to be possible to get going again and this is the toughest kind of situation to prepare for.
Victoria Moores: Yeah, and absolutely in that rolling delay situation the problem is just that total absence of certainty. And that's what we've got, not on the flight scale, but on a worldwide scale for aviation and for all industries right now.
Patrick Edmond: Yeah, very much so. And I have to recognize as well that aviation is just one facet of a huge global and societal crisis here, and there are much bigger problems let's say just then than what's happening in the airline industry, but within the airline industry, which has become so critical to modern economies, it's really difficult at the moment to see exactly how that's going to get back on stream. One of the things we see as well, and one of the things I've noticed from talking to various airline CEOs, is they recognize that the industry after this is going to look different. It's not simply going to be smaller, but for example, airlines are going to have different partnerships. So alliances may not have the same level of power that they did because those mid-sized carriers will have retrenched quite a bit. So we'll see more partnerships between network carriers and low-cost carriers, for example. So I think we'll see really a shake up in the structure of the industry as well.
Victoria Moores: Mm-hmm (affirmative). Also, we've focused conversation so far, largely on to the airline side of things, which is obviously a strong focus for the industry because that's power house that creates a production to keep it going. What about lessors, what about OEMs? What are you seeing on that side of the business?
Patrick Edmond: There's plenty of pain to go around, here at the moment. And if you look at the number of aircraft that have been parked up over the last few months, some of those of course will come back into service. But we saw in the last few days, British Airways taking their 747s out of service definitively, A380s are rapidly becoming a thing of the past. Anything with four engines seems to have its best days behind it, at this point. I think the lessors are going to suddenly find they have a great deal of metal parked on the ground. They're taking an awful lot of impairments and the good days, I think, may be behind them for a fairly extended period.
That extends also to OEMs. One of the big drivers, obviously for buying new aircraft is fuel efficiency in a high fuel price environment. You want more efficient engines, more efficient aircraft. And also of course, larger aircraft to get seat-mile costs down because on busy routes in times of growing demand, you want to be able to carry more passengers. Well, we're in a low fuel-price environment at the moment. We're not really in a position to attract lots more passengers. So the winners for the next few years, I think are going to be the efficient small aircraft. And in that context, I look at things like the A220, the CSeries, and the A321LR and XLR from Airbus as being the closest thing there are to winners in the likely future market, because these are aircraft that can very efficiently reduce trip costs by flying relatively small numbers of passengers further than was previously technically possible. So I think they will be attractive to airlines trying to deal with a restricted demand environment for the foreseeable future. And other than that, I think for lessors and indeed for OEMs, I think we have another cold winter coming in and a bit of cold weather after that for some time. I'm really sounding cheerful here aren't I, Victoria?
Victoria Moores: It’s possibly not a way to brighten up a morning, but it's the reality that we're facing at the moment. And sort of-
Patrick Edmond: I recall a story from many decades ago. I believe there was an astrologer writing for a newspaper. I think in the US, who got bored from writing the normal horoscopes. And one day wrote a horoscope which said, "All the sorrows of yesteryear will be as nothing compared to what will befall you in the near future." And that got published and their editors weren't very happy with it, so they fired her. So, in that way, I think it was an accurate prediction. So I don't like to sit here and say, "All the sorrows of yesteryear are as nothing compared to what will befall the industry." But I think at the same time, we have to recognize it's going to be a very different industry going into the future. And we don't even have the clarity to see when that future is going to start just yet.
And we've spoken about COVID obviously, but if we cast our mind back to those happy days pre-COVID, it wasn't that the industry was devoid of challenges. One of the big challenges coming down the tracks was global warming and the effect of aviation-related emissions. And that hasn't gone away, for example, in a European context, in an EU context, a lot of policy work is going into decarbonizing the economy and airlines are going to find themselves facing into that new normal as well, once they come out of their COVID-related crisis.
Victoria Moores: So airlines have been holding their breath to try and get through that unfortunate horoscope prediction that came through in March and they're going to come up for air. And then the next thing that's going to be pushing them under is this big environmental push, to really decarbonize the industry.
Patrick Edmond: Yes, that's right. So I think we're just facing into a tough time on multiple fronts. Now this is a hugely resilient industry. It isn't going to go away, but it is a, let's call it a one-two punch, if you like between COVID and environmental pressures, the likes of which I think the industry has never seen before.
Victoria Moores: Mm-hmm (affirmative). Final question Patrick, there's a lot of talk of building back better. Do you think that that's possible, to build back better and to create a stronger industry coming out of this?
Patrick Edmond: And I'm not trying to avoid the question, but it really depends what you mean by better. I think the new industry will be more suited for the new world, but it isn't going to look that much, in many ways, like the old industry. That well-known sociopolitical analyst, Mr. Bruce Springsteen said, "The jobs are going boys and they ain't coming back." Now he wrote that several decades ago, but we're going to see a smaller industry. We're probably back to what I said about environmental issues, within a few years the idea of flying away, halfway across the continent for a weekend break and doing that as a routine thing is probably going be a charming memory of the past. So I think we're going to see an industry that is fit for purpose in a new world, but it's going to look quite different to what we've been used to until now.
Victoria Moores: So a changing landscape when we come up above this water then?
Patrick Edmond: That's right, so we just have to keep holding our breath and practicing our control and trying to keep floating.
Victoria Moores: Okay. Well, it’s not been the most positive conversation, but it's certainly been a realistic conversation for what's happening right now. Thank you very much for joining me this morning, Patrick.
Patrick Edmond: You're very welcome, Victoria. It's always a pleasure.
Victoria Moores: Thank you. This is Victoria Moores reporting for Air Transport World.
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