Saving national airlines during unprecedented times
By Vijay Poonoosamy, member of various international aviation and tourism advisory boards
Air Transport is and survives by being the arteries of the world at large and particularly of tourism and international trade. It represents and thrives by being the wings that enable individuals, entities, private and community sectors to connect nationally, regionally and globally and to reach their various objectives and higher altitudes of success. Airlines have invested billions in next generation aircraft and technology, in recruiting and training personnel and in growth strategies to meet, stimulate and rise to an ever-increasing demand for business, work-related, leisure, religious, medical, educational, VFF (Visiting Family & Friends) travel by air.
COVID-19 has clipped the wings of air transport by obliterating demand and curtailing supply, except for air freight and a few domestic flights. In so doing, it has transformed air transport’s virtuous circle into a vicious one and proved fatal for many airlines. With no flown revenues but with massive debts and onerous commitments for aircraft and engine purchases, huge monthly lease payments for aircraft and engines, significant labor and other recurrent costs, even the well run and financially healthy airlines cannot survive without external support. The less well run and financially frail airlines need even more external support to survive. The poorly run and financially challenged airlines that were already destined to fail before COVID-19 clearly need much more than external support if they are to have any chance of escaping their expected fate.
The longer COVID-19 chokes the world the worse it will get for airlines. It will also be more difficult for them to secure the required external support with economies stalled and government finances under unbearable stress.
With millions of bereaved families, millions of bankruptcies, the destructive recession, millions of jobs losses, severe drops in household incomes, on-going health concerns, travel restrictions, lockdowns, new COVID-19 related pre-boarding screening and on-board seating restrictions of passengers, the ailing air transport and cruise sectors, the unpredictable nature of COVID-19, the psychological impact of all of the foregoing and the consequential undermined confidence in air travel, it is clear that the airline industry will continue to suffer for much longer.
For these same reasons, it is also clear that there cannot be a tourism revival any time soon and, since the airline and tourism industries are interdependent, this will only compound the extraordinary challenges of the airline industry. Business travel will also be a challenge given the widely recognized convenience and cost-effectiveness of video conferences and the fact that COVID-19 will continue to preclude large international and regional trade fairs and conferences. Even the future of air freight is subject to the impact of COVID-19 on international trade, national economies and the focus on national self-sufficiency.
Moreover, the airline industry will have to credibly rise to its formidable environmental challenge as a matter of urgency because the world is now more alive to the need to protect our environment. However, the cost of meeting part of that challenge just got more significant for airlines since ICAO’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) provides that aviation’s offsetting requirements for any year from 2021 will be based on the delta between international aviation CO2 emissions in that year and the average baseline emissions of 2019 and 2020. As the 2020 international aviation CO2 emissions will be significantly lower because of COVID-19, the airlines concerned will need to purchase a much higher number of offsets.
Airlines are lifelines and we have seen some at their best when operating flights of national solidarity to either bring stranded nationals back home or to bring essential medical supplies home. It is thus understandable that some countries do not want to see their national airlines disappear, but it is evident that shareholders, including Governments, are unable to invest in airlines that were already in intensive care before COVID-19 and did not make the necessary changes to survive. These airlines were already set to fail but their predictable demise has simply been fast-tracked when their own failures were compounded by the unprecedented negative impact of COVID-19 and the unpredictability of what the new normal will be in the world being shaped by COVID-19. These countries can no longer afford to provide extended life support to or risk yet another useless strategic review of these doomed national airlines.
There is no silver bullet or one size fits all solution but I believe that the critical starting point is to secure an immediate paradigm shift from the traditional narrow focus on shareholders to the wider focus on national stakeholders and to agree on the Fundamental Purpose of the national airline.
I humbly suggest that the Fundamental Purpose of a national airline should be to serve the national interest and contribute to national socio-economic development by providing the strategic air links safely, smartly, efficiently, sustainably and cost-effectively in the fast mutating world. All national stakeholders must embrace the Fundamental Purpose and set reasonable expectations in terms of connectivity and profitability. The shareholders, especially and possibly exclusively the national government, must invest significantly in a refreshed and right-sized national airline. The national airline must be fully and holistically re-calibrated to fit the severely limited demand. This will require urgent and protracted negotiations with the shareholders, the government, the unions, airline partners, service providers, aircraft and engine manufacturers, lessors, banks and other creditors to ensure that the national airline gets the aircraft type, the personnel and the capital it needs to survive. This will inevitably require both significant understanding, sacrifices and concessions by all and a recognition that nobody wins if the national airline does not survive.
The stakeholders must accept that the re-calibrated national airline will be on a diminishing loss-making course for some time but that its losses will be progressively offset by its multiplier effect on the national economy. The shareholders must also accept that the profits which the national airline will eventually make will be fully re-invested in the national airline to allow it to contribute even more to the nation’s socio-economic development.
The shareholders must set up a competent, honest, diverse, and respected Board of Directors whose members demonstrate integrity, adhere to the best norms of good corporate governance, and add significant value. The Board must ensure that the national airline is effectively managed by competent, innovative, savvy, honest and committed professionals whose integrity is never in doubt.
A country that genuinely and immediately embraces such a new national airline paradigm will give its re-calibrated national airline a fair chance to survive, and in due course, thrive and enable the country to also spread its wings.