When assessing the current aviation market, the spotlight of worries falls upon the smaller independent airlines, which seem to have taken a great deal of stick in the press of late, while the flag carriers – a great many of them overblown and totally unprofitable prior to the pandemic – are now seen as the last airlines standing due to government intervention.
The worst offenders are Alitalia and Air India, but the worst offenders may be the Chinese big three carriers and the Middle East majors, along with South African Airways, Thai Airways, Malaysian Airlines and myriad more flag carriers all receiving support and government interference in equal measure. Then there are the very well-run airlines such as Lufthansa and Air France-KLM, which have also received huge sums from their respective governments. At the other end of the scale there is EL AL and British Airways – both told to sort themselves out in effect by their governments, and indeed they are. The leading mighty US majors have raised huge sums to ride out the crisis, leveraging any and all assets they can.
In all this there is one flag carrier that has an interesting dilemma – Austrian Airlines. Austrian is of course owned by the mighty Lufthansa, but this airline went into the crisis losing fortunes on many of its long-haul routes and cutbacks on the same were not going ahead fast enough. Perhaps Austrian should take this opportunity (callous though it may sound) to take an axe to the long-haul network and dump the six, approx. 19-year old Boeing 777-200s and six 24-year-old 767-300s and instead look to feed Lufthansa’s long haul network and the Swiss International Airlines long haul network (also owned by Lufthansa) instead? This may be to the benefit of all airlines in the group? Austrian could also take-on the Lufthansa branded aircraft that will otherwise remain on the ground. Although potentially helpful, this course of action will not solve the underlying problems within the Lufthansa Group.
This is the sort of thinking that must happen if airlines, especially airline groups, are to progress. Investors should look out for this type of action and maybe raise questions if it is not happening, especially when 20-year-plus aircraft are involved. Route network consolidation should be the mantra of H2 2020. This is backed-up by the fact that European air traffic is at this time just over 60% down on 2019 levels but route numbers have only been cut by just over 38%, airlines are therefore cutting frequency but preserving their networks.
In the USA during lockdown in April 2020, traffic was 96% down over the same period in 2019. Between April and July 2020 US traffic remained 73% down on 2019 levels. Right now US air traffic is 64% down on 2019 levels. Unless Capitol Hill provides financial assistance (discussed here yesterday) then we can expect United/American/Delta/Spirit to lay-off around 60,000 staff (figures estimated by the airlines). Southwest has already got 17,000 on extended time off with early retirements on-going.
Do let me know your thoughts on the next steps airlines should be taking.
Philip Tozer-Pennington