The airline industry remains in the early stages of an unprecedented crisis. Demand, while beginning to recover, remains minimal, and cash is flowing out at stunning speed. A wave of bankruptcies has yet to materialize, but only because governments were quick to bail out airlines identified as being too big, or too economically important, to fail.

Now that there are early signs of recovery, airlines face their next major challenge—quickly rebuilding networks that took decades to construct and optimize. Among the key questions they are pondering: Which markets should come back online first, and how should they be served? Does local traffic have priority over connecting markets or vice versa? Which aircraft should be flown? And how much of the rebuilding can be modeled on past flows?

• Airlines may lose $100 billion through 2021
• Annual passenger total is reverting to the 2006 level

The answers, much like the recovery’s expected path, will differ based on specific circumstances.

“Normally, network planning is one-third math, one-third trial and error and one-third gut feeling,” says Philipp Goedeking, managing director of consultancy Avinomics. “During the coronavirus pandemic, it’s really only 10% math. There will have to be a lot of experimenting.”

For hub carriers, a top-to-bottom rebuild should, in theory, start with long-haul connections, as they have the most logistical limitations. Asia-Pacific evening departures arrive in Europe in the morning and must be timed to abide by curfews while maximizing passenger connections. Most lucrative are long-haul-to-long-haul connections, in this case Asia via Europe to North America or Africa.

But the pandemic’s realities mean this theory must be altered significantly. While domestic and regional travel restrictions have begun to come down in many parts of the world, most remain in place for long-haul flying. That shifts the focus to domestic and short-haul operations. Lufthansa, for example, recorded less than 2% of its normal traffic in April but is now expanding to 15% in the second half of June. Published schedules through September have capacity back to 40% of precrisis levels, but the airline will serve 70% of its previous long-haul points and 90% of European destinations. In other words, its network will be broad but not deep. Many markets will be served but at low frequency.

That pattern is popular with other carriers operating different business models. EasyJet is flying 30% of normal July-September levels but will be covering 75% of its network by August.

Given the trend of broad but limited demand, European airlines are restarting their networks with small aircraft. Beginning June 15, Austrian Airlines is operating the first routes, after an almost complete three-month lock-down, using mainly Embraer 190s and de Havilland Dash 8-400s.

Another element of pandemic-induced passenger behavior wreaking havoc on airline planning is last-minute booking. International Air Transport Association (IATA) data show a preference for very late booking—61% of passengers are buying their tickets within three days of departure, compared to 46% before the crisis. The share of passengers booking 12 days or more prior to their planned flight, is down to 8% from 20%.

The shift means visibility of actual loads is more limited than before, but there is also more significant upward potential right up to departure. Historical volumes for specific city pairs at certain times of the day are also of limited value.

Coming out of an almost complete standstill with little data to support forward-booking estimates has airline leaders understandably nervous. Some contend that discounting will not help the recovery, because the demand dip is more linked to health concerns than economic considerations. 

Despite this, and perhaps in response to historically low load factors even with major capacity reductions, fares are falling. IATA figures showed domestic ticket prices were down 23% in May compared to a year ago. International fares did not drop as fast, but a near-complete lack of capacity to sell likely helped support pricing.

Many airlines expect international ticket prices to drop, too, as capacity begins to return over the coming weeks. Europe, in particular, bears watching as more governments move to lift travel restrictions.

While each region will face unique sets of restrictions and COVID-19-contamination risks that will influence how airlines proceed, several general global trends are expected to emerge. Domestic routes will generally recover first, followed by short-haul international markets, with most long-haul services lagging. Leisure-traffic demand will lead recovery in many regions, as individuals relieve pent-up urges of wanderlust while companies remain conservative with travel budgets.

Across networks, frequencies will build slowly, and in some cases—the U.S. being a primary example—the larger airlines’ desires to rebuild balance sheets will take priority over replicating prepandemic capacity. 

The Asia-Pacific region is following the pattern, with many domestic markets bouncing back quickly as internal travel restrictions ease and airlines reestablish routes, generally with fewer frequencies. Attention is shifting to the more complicated question of how and when international services can be restored.

Asia-Pacific

Several Asia-Pacific airlines have begun to tentatively add more routes to their bare bones international networks, even though travel restrictions have yet to ease significantly.

Restarting with low frequency allows these airlines to meet the limited demand that exists while positioning themselves to respond when more markets reopen. In some cases, airlines have been initially focusing on routes that have strong cargo and passenger demand.

For most carriers in the region, strategies to rebuild international networks will depend heavily on government decisions to reduce cross-border restrictions. Asia-Pacific countries have widely contrasting rates of progress in containing the pandemic, meaning restrictions will ease at different times and will often be difficult to predict.

Singapore Airlines (SIA) and Cathay Pacific are particularly focused on international markets reopening, as they have no domestic networks. Cathay Chairman Patrick Healy says that the carrier is “even more vulnerable” to international restrictions than others because it is “wholly reliant on cross-border travel.” In most cases, there is little clarity on when and how restrictions in other markets will be lifted, SIA CEO Goh Choon Phong says. This adds a major challenge to network recovery planning.

SIA and Cathay also have a higher proportion of international transit traffic via their hubs than most other airlines. They rely on connecting traffic flows, such as those between Western Europe and Australasia.

Singapore and Hong Kong both decided to allow transit passengers through their airports starting in June. Most foreign travelers will not be allowed to end their journeys in Hong Kong or Singapore, but they will be able to connect there.

This is an important step for Cathay and SIA. Although many of their key markets for connecting flights remain closed, they can position themselves to capture transit traffic as it begins to return. They can also ensure that other major connecting hubs in Asia and elsewhere do not steal a march on them and gain a competitive advantage.

Discussions have begun among some Asia-Pacific governments about easing border and quarantine restrictions to allow some essential travel to resume. These will initially be bilateral arrangements between countries so that procedures and safeguards can be rigorously monitored. Such programs may expand to multilateral agreements in the longer term.

China and South Korea were the first to establish protocols for approved essential business travelers, starting May 1. China and Singapore began a similar program in early June. These countries are also holding talks with other Asia-Pacific countries with a view to forming essential travel agreements.

For many Asian airlines, access to China is vital to their networks, and they want to begin reopening routes to Chinese cities. However, the Chinese government has heavily restricted international service due to COVID-19 concerns. The rules were eased slightly on June 8, but carriers are still limited to a few weekly flights.

Korean Air and Asiana Airlines said in May they intended to add several flights to mainland China to their June schedule, if approvals could be obtained. But because the restrictions were not loosened sufficiently, both airlines were forced to shelve these plans. Their schedules now list one route each through July.

This situation highlights that resuming international services will require flexibility for many Asian airlines. Plans will often have to be changed at short notice if governments do not open borders as expected, or if new spikes in coronavirus cases arise.

Meanwhile, Australia and New Zealand plan to establish a travel bubble that would allow all passengers to fly between the two countries with no quarantine requirements. Qantas CEO Alan Joyce says if it is successful, this could be a template for opening other international markets one by one. A joint industry/government working group with representatives from both countries has presented a report on how the travel bubble could be implemented.

North America

In the U.S., carriers are restoring capacity at an uneven pace, largely depending on their relative exposure to international flying. Canada-U.S. flying remains off limits to all but essential travelers, cutting off a major market for carriers from both countries; Air Canada generates 22% of its annual revenues from U.S. flying.

Among the Big Three U.S. legacy carriers, American Airlines is adding back flights most aggressively in July, with plans to operate 55% of its domestic schedule, boosted by a heavier focus on domestic flying. Delta Air Lines and United Airlines—with greater exposure to long-haul markets across the Atlantic and Pacific—are taking a more conservative stance, adding back 37% and 30% of domestic routes, respectively.

“American Airlines went into the crisis in worse shape than Delta or United in terms of its balance sheet, but in terms of a domestic rebound, its network exposure is the best of the three,” says Seth Kaplan, an airline analyst with Kaplan Research. “The reality is that Delta and United are structured as more global airlines. That’s a great thing to be when the global economy is going well, but right now, you’d probably rather have American’s network.”

Beyond the Big Three, the country’s domestic carriers are restoring capacity at an accelerated clip in July, bolstering the view that international exposure is a near-term impediment to recovery. Southwest Airlines and JetBlue Airways, for example, will operate 62% and 50% of their respective original schedules, while smaller leisure carriers such as Allegiant Air and Spirit Airlines will operate at 85-90% of last year’s capacity.

More aggressive growth by smaller carriers and conservative advances by the Big Three would be a repeat of the post-Great Recession recovery. Delta Airport Consultants (DAC) sees this as a likely scenario, with one notable exception—Southwest will join its smaller competitors in the more aggressive camp.

The Dallas-based carrier’s current schedule has its late-2020 capacity on par with year-earlier figures. The aggressiveness is a sign that Southwest is prepared to leverage its predominantly domestic network to grab market share from competitors with weaker balance sheets and hubs to rebuild that rely on at least some international feed.

The strategy is reminiscent of the period after 9/11, when Southwest’s labor-cost advantages, combined with financial frailty among its largest U.S. peers, left it in position to strike—and strike it did. While American, Delta and United (and their premerger partners) hobbled along for most of the decade at capacity levels below those of late 2001, Southwest and smaller majors, including Alaska and Hawaiian Airlines, plus the ultra-low-cost segment, grew relative to 2001.

Based on announced aircraft retirements, the fleets of American, Delta and United combined are “likely” to be at least 17% smaller well into 2022, says DAC Chief Industry Strategist William Swelbar. Delta and United have older fleets, while American, with a younger fleet, has nearly as many leased aircraft as those two plus Southwest combined.

“American’s new fleet, and the expense associated with that fleet, will force it to fly more than the network might support initially,” Swelbar says.

Meanwhile, Southwest has a simpler, domestic-heavy network to stimulate and tremendous fleet flexibility. The carrier has more than 100 older Boeing 737NGs that it could park or keep flying and new 737 MAXs on the way.

“Southwest is the wild card,” Swelbar says. “Will they get smaller, or will they take advantage of the opportunity to increase their share in critical markets?” 

Early indications from the airline suggest the latter. “Our progression from April all the way through to the last few weeks of December can basically be thought of as one flat, long, steady ramp-up of capacity,” says Southwest Chief Commercial Officer Andrew Watterson.

DAC’s outlook for the U.S. market projects what it calls a “square-root-shaped” recovery, combining a steep, initial rise followed by years of minimal growth that mimics that math symbol. Strict capacity discipline by the Big Three—Swelbar says annual capacity-increase percentage rates for American, Delta and United may lag behind GDP growth—will keep the U.S. market from becoming a yield-eroding market-share battle.

More headwinds will come from what Swelbar says will be a return of the “hassle factor.” Much as new screening protocols rendered short flights less practical and all flights less convenient after 9/11, new health-screening requirements will add time to travel. The Airports Council International suggests building in 1 hr. or more per departure, at least at the outset.

The bottom-line result from DAC’s model indicates a full recovery to 2019-level traffic figures in 2024 at the earliest, and the networks will not look the same. A conservative approach to growth by the big network carriers, combined with the added burden created by new protocols, could be enough to render some short-haul flying redundant, Swelbar says. The most vulnerable markets are small and nonhub aircraft within 180 mi. of a large or medium hub. There were more than 160 such routes on U.S. schedules before the pandemic.

Global Outlook

IATA expects the recovery to be slow, with aggregate global airline profitability returning in 2022. Profits then would be “in line with longer-term growth trends for passenger and cargo traffic,” Chief Economist Brian Pearce says.

IATA’s nearer-term outlook sees a relatively steep recovery of global airline traffic, down as much as 95% year-over-year, to a full-year figure of 54% below 2019. Next year, traffic will be 29% below the 2019 baseline, but up 55% from the anomalous 2020 results.

Pearce says the pattern is similar to how the industry emerged from the global financial crisis in 2008 and 2009, albeit with losses at “a much larger scale.”

The IATA guidance is based on several assumptions but contains significant uncertainty. IATA assumes the novel coronavirus can be contained, a second wave of infections can be avoided, and testing will be effective in 2021. The effects of a recession, a slow reopening of markets and a cautious return of business travel are also factored in. Importantly, the forecast is based on a vaccine not yet becoming available through next year. The pace of the recovery could therefore accelerate should a vaccine be found sooner.

Based on the traffic growth, IATA now believes the airline industry will lose $84 billion in 2020 and $15.8 billion in 2021, breaking a decade-long streak of full-year profits. The industry made a $220 billion net profit in 2010-19, and the 2016-19 profit was $120 billion.

IATA expects 2020 revenues to fall by 50% to $419 billion in 2020 and climb back to $598 billion next year.

“Financially, 2020 will go down as the worst year in the history of aviation,” says IATA Director General and CEO Alexandre de Juniac. “On average, every day of this year will add $230 million to industry losses.”

He estimates that airlines will carry 2.2 billion passengers this year, a full-year mark last seen in 2006, and lose $37 on every passenger flown. Next year’s passenger count is projected to approach 3.4 billion, or just more than 2014’s annual total.