This week has seen the greatest amount of capacity cuts in the West, as airlines respond to government travel bans and demand reductions amid the global coronavirus pandemic. We take a look at the cuts, what’s happening in China and attempt to answer the question of when we will reach the bottom.
This morning, I had the pleasure to attend an OAG Webinar discussing coronavirus capacity cuts, and what we can hope for the future of aviation. Moderated by Deirdre Fulton, a partner of MIDAS Aviation, the webinar was attended by John Grant, Senior Analyst for OAG, Brendan Sobie, an aviation consultant and analyst at Sobie Aviation, and Professor Zheng Lei, founder and president of The Institute For Aviation Research. Presenting the OAG insights was Rothna Begum, Director of Data for OAG.
During the webinar, participants enjoyed an in-depth discussion around where we are right now, and how much more we can expect in capacity cuts. Here’s what we learned.
Where are we now?
It’s been a massive week for capacity cuts. Since Monday alone, we’ve seen Singapore Airlines cancelling most of its flights, Emirates and Etihad suspending almost all operations, India banning domestic flying and both Qantas and Air New Zealand stopping all international flying. Some carriers, such as Ryanair, have grounded their fleets entirely.
Right now, from a Europe and also US standpoint, we’re still on the way down. In the past week, flights in Europe are down some 60% compared to the same week last year, a figure that equates to a loss of around 92.000 flights. Over in the Middle East, flights are down 45%, although that number is set to become higher next week as the UAE suspends all flying.
In contrast, the Asia-Pacific region has only lost 30% of its flights, and there are some glimmers of hope emerging from the Far East market.
Learning from China
To evaluate how the current global pandemic will affect airlines, we need to look to China for a glimpse into the future. Chinese carriers were the first to begin taking flights off the schedule, and as such will be our canary in the coal mine in terms of what we can expect in other markets.
By the first week in February, China’s capacity was down 22.7% from the same week last year. A week later, it was down 63%. The peak came in the week of the 17th February, when reductions hit 70.8% year-on-year.
However, in the past couple of weeks, we’ve seen some signs of recovery. OAG data shared on today’s webinar shows that, by the 16th March, capacity was down just 38.7%, and this week it reduced even further, showing a drop of just 37.5%. Most of this capacity increase is in the domestic market, but it’s a hopeful sign of recovery just five weeks after the capacity crunch peaked.
During today’s webinar, Zheng Lei revealed some of this week’s figures from China. China Southern is reporting a 60% load factor on the flights it is operating, while Hainan Airlines flew 254 flights on the 24th March, operating at an average load factor of 62%. The HNA Group reports similar load factors across all its airlines. These are small but positive steps on the road to recovery.
When will we hit the bottom of the curve?
For the US and Europe, following several weeks behind China, evaluating where the bottom of the curve in capacity reduction falls is not easy. However, Brendan Sobie made a strong prediction that we are getting very close to seeing the absolute peak of capacity reduction already.
He predicted that, by early April, we will see the extent of the capacity cuts here in Europe. By then, he forecasts a 95% reduction in international capacity, with domestic capacity running at between 50 – 100% reduction, depending on the policies of individual nations.
Right now, there are still pockets of demand particularly for repatriation flights to get people back to their homes. While this may continue for days or a week or more, eventually this too will end, and we’ll be able to see where the bottom lies.
As for the recovery, it’s anyone’s guess as to how far and fast this will spread. As noted, Chinese airlines are beginning to reinstate domestic flights, and international will follow soon after. initially, these will be to important markets such as South Korea, Japan and Singapore, for example, but we can expect to see a gradual capacity return in the region over the coming weeks and months.
One big factor in the speed of recovery will be the support airlines receive from their governments. Chinese airlines lost an estimated $5bn in February alone, according to John Grant, but much of this will be absorbed by the state. The support China has given its airlines has been crucial to their recovery; can we expect the same in Europe and the US?
What will aviation look like when it does return?
As John Grant put it in the webinar today, “the aviation market will return, but its size, shape, scale and structure may be very different to what it is now.” Reinstalling capacity is going to be key to economic recovery around the world, but what does that reinstallation look like?
We’ve already seen early retirements of many older, less efficient aircraft, and John predicts this will continue. He says there is little reason for airlines to begin services any time soon with aircraft such as the Boeing 747 or the A380, as demand is likely to be down and airlines have plenty of spare capacity in their fleets, often newer and more efficient choices.
Whether we will ever see these aircraft return will depend largely on the time it takes for demand to recover. And that in itself is somewhat dependent on economies recovering well. It’s a chicken and egg situation, and one which is only going to be possible with extensive governmental support.
Over in the US, President Donald Trump is finalizing details of a $50bn bailout for airlines. In Europe, different governments are reacting in different ways. The UK, for example, has made clear there will be no blanket airline bailout, and that cases will be considered on a bespoke basis. Conversely, other nations are pouring money into national carriers to ensure they can return to the market with strength behind them.
While we can take some cues from China, things are already proving to be very different in the West. As such, we can take some seeds of hope from aviation’s recovery in the Far East, but take them with a pinch of salt, as so much right now remains unknown.
What do you think? Will we start to see a recovery by early April, or will the unique markets of the West mean the impact is even greater than we’ve seen in Asia?