Low-cost airways could possibly be higher positioned for 2021

Aircraft operated by Qantas Airways’ low-cost airline Jetstar Airways sit on the tarmac at Melbourne Airport in Melbourne, Australia on Tuesday, September 1, 2020.

Carla Gottgens | Bloomberg | Getty Images

SINGAPORE – As the world races to roll out mass vaccination programs to fight Covid-19, more airlines are likely to go broke this year, analysts say, and pre-pandemic demand will not return anytime soon.

But there could be a bright spot: low-cost airlines, which mainly fly domestic flights, could recover faster than their larger full-service counterparts.

More airlines could go bankrupt

“There will be outages due to a lack of oxygen,” Peter Harbison, chairman emeritus of consulting firm CAPA – Center for Aviation, told CNBC via email. “Consolidations outside of the domestic markets are too difficult, so failures are more likely.”

According to travel data company Cirium, 48 airlines failed in 2020.

Thanks to the infection status in many countries and the continuing likelihood of border closings / quarantine, there is a reluctance to book in advance despite super-cheap tariffs …

Peter Harbison

CAPA – Center for Aviation

Last year governments intervened with “support against gravity” to keep airlines alive through a combination of direct funding and job support programs, Harbison said.

“Cash flow is becoming increasingly critical and all airlines are still burning huge amounts of it,” he said, adding that airlines tend to collect cash from advance bookings for spring and summer this time of year.

“But thanks to the status of infection rates in many countries and the continued likelihood of border closings / quarantines, there is a reluctance to book in advance despite super-cheap rates and generous exchange / refund terms,” ​​said Harbison. “There are a lot of variables, but I don’t think the necessary money will come in until mid-2021, even if then.”

CAPA’s forecast assumes that pre-pandemic air travel cannot be reached until 2025 as uncertainty about the recovery continues, compounded by a sharp drop in business travel and far fewer international seats flying.

Low cost airlines can survive better

Industry experts say that low cost airlines serving local or regional markets may have a higher chance of survival than full-service intercontinental airlines. This is likely due to the fact that international borders remain closed for a short time and fewer business travelers are around.

Shantanu Gangakhedkar, a consultant at Frost & Sullivan, said domestic routes in the Asia-Pacific region had recovered somewhat. “I believe that airlines that have a strong presence in the domestic business are comparatively better positioned, at least until the border restrictions are lifted,” he told CNBC in December.

It is important for airlines and the entire supply chain to adapt to a smaller industry and prepare for very different market demands.

Joanna Lu

Asia’s advisory director at Cirium

Gangakhedkar says low-cost airlines have an advantage over their full-service airlines as they have lower operating costs and their fleet is largely made up of single-aisle aircraft suitable for domestic routes.

Asia Pacific airlines will face overcapacity for “at least a few years” and that could lead to consolidation between airlines and aircraft rental companies and suppliers, said Joanna Lu, director of Asian advisory at Cirium.

“It’s important for airlines and the entire supply chain to adapt to a smaller industry and prepare for very different market demands,” she told CNBC last month.

Even so, Lu warned that low-cost airlines can’t hold out forever.

“If the pandemic continues and travel restrictions remain in place, (low-cost airlines) will also become more vulnerable,” she said.

Impending uncertainty

Last year, as the coronavirus pandemic spread across the world, border closings and various social restrictions crippled the aviation industry, forcing global airlines into survival mode.

According to travel data company Cirium, passenger numbers fell 67% last year compared to 2019, and many airlines were forced to cut spending by an average of $ 1 billion a day, despite massive government funding helping to stave off large bankruptcies.

The International Air Transport Association (IATA) announced in December that airlines will experience a net loss of $ 118.5 billion by 2020 and a net loss of $ 38.7 billion in 2021.

CAPA’s Harbison said internationally that uncertainties in areas such as passenger safety, airlines, and opening and closing borders remain a major challenge. There are also “few domestic markets of great value,” he said, adding that even then, countries like Japan, South Korea and China are experiencing a Covid-19 resurgence.

“In the domestic markets, vaccines will be the biggest tailwind for reopening, but we still have a long way to go and mutations threaten to ruin some of those efforts,” he said.