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A Brighter Outlook For Airlines In 2022?

Airlines are on the cusp of facing their third year dealing with the Coronavirus pandemic. The challenges have continued relentlessly, ranging from new variants of the virus, to shifting government policies on travel restrictions and testing. The impact on customer confidence and on airlines’ ability to plan and operate predictable schedules has hit revenues and finances severely. 

However, compared with the outlook when I reviewed the landscape 12 months ago, there are reasons for cautious optimism for 2022.  That is not to say that it will be anything like a normal year, but we are in a different place. 

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Vaccinations

There has been enormous progress in many parts of the world in achieving high levels of vaccination though there are significant gaps. Equally, there are countries where minimal progress has been made so the maxim “no one’s safe until we’re all safe” is still valid.

We’ve also seen that vaccines cannot provide a 100% solution with “breakthrough” infections occurring in fully vaccinated people. Then there is the ability of the virus to mutate as we’ve seen with the highly infectious Omicron variant. The good news is that it seems typical infections are much milder with significantly reduced hospitalisations and mortalities. This gives more hope that the airline industry can start to get back on its feet and look forward to a better summer but the reality is we simply cannot be complacent. There will be other variants and we have no idea what their characteristics and impacts may be.

Hesitant Progress    

Just prior to Omicron rearing its ugly head, the industry had been on a bit of an up as 2021 drew to a close. Late summer had delivered some positive performance in European short haul leisure markets to the benefit of LCC’s (low cost carriers) in particular and in autumn the two step opening of the important North Atlantic market, first to vaccinated US citizens in September and then to similarly vaccinated Europeans in November, took the lid off pent up demand for travel “across the pond”. 

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Government quarantines restrictions and testing requirements started to reduce and everyone breathed a sigh of relief until Omicron hit. Things began to go into reverse, quarantines and extra testing were back on and all bets were off for the normal Christmas travel rush and the start of the impotant booking period for summer 2022.

As I write and Omicron appears to be receding, it is apparent that much of the peak Christmas travel did take place and whilst the rest of the northern hemisphere winter looks bleak (as it normally would) and some airlines have cancelled swathes of flights, there is evidence that people are still eager to book up for the months ahead. With the caveat that there is no virulent vaccine escaping follow up variant, the Intra European and North Atlantic markets look set to have a significantly better performance in 2022 than they did last year. Certainly, IATA sees these as the two leading global regions for strong recovery over the coming months.

Varying Picture Globally

For airlines operating in other global markets, the picture is mixed. Australia, a highly important market for leisure and VFR (visiting friends and relations) traffic to the UK and Europe, had been closed since the onset of the pandemic and is now opening up. So too are markets such as Dubai, which has made a virtue of its good Covid management and has been able to tap into strong tourism flows supported by its Expo 2020 event, which is currently running 12 months later than planned. Emirates, which was already using most of its Boeing 777-300 ER fleet due to their cargo efficiency, has now reactivated close to half of its 100 plus Airbus A380’s.

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Asia remains the area of most shocking weakness, with carriers in the region reporting international passenger traffic at little more than 5% of pre Covid levels.  Local Asian carriers are being beaten up, not least Cathay Pacific, which has suffered from local political criticism as well as an exodus of pilots, fed up with the extensive quarantines to which they are being exposed. China remains resolutely closed with no hint of change anytime soon. Even its domestic market is under pressure impacted by localised lock downs.      

European carrier exposure to these markets varies, with British Airways for example, only previously having low single digit capacity exposure. The exception is Finnair which has built its strategy around developing a Europe-Asia hub, exploiting the geography of Helsinki and has invested in a large fleet of Airbus A350’s for this purpose.  Significant adaptation is needed to stem the losses and it has already pointed some aircraft west, adding North Atlantic capacity as well as seeking opportunities outside of Finland by establishing a base with three A350’s in Stockholm.  

Adaptation Is The Name of The Game

While the outlook /prognosis for 2022 is far from certain, I am encouraged by a number of positive developments we’ve seen taking hold recently. LCC’s have continued to exploit the crisis to great effect by jumping into gaps left by other retrenching carriers or by exploiting new opportunities, demonstrating true agility, moving aircraft around extensively. In the case of Wizzair and Ryanair this is being backed by massive fleet expansion and new orders. easyJet, having actually shrunk its fleet, nevertheless undertook a substantial equity raise in late 2021 to provide fire power to pick up opportunities and has already redeployed aircraft and snapped up valuable additional slots at airports including London Gatwick and Milan Malpensa.

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In the long haul arena, we’ve seen airlines using the excellent cargo capability of new generation aircraft like Airbus’s A350 and Boeing’s 787 to deliver lucrative capacity in the face of supply chain bottlenecks for road and sea freight and supporting growth in e commerce. This is likely to remain a valuable revenue stream through 2022 and many airlines have adapted effectively to exploit this.  

Where markets such as the North Atlantic have been off limits for most passenger traffic, some airlines have switched aircraft to other geographies and opportunities, to make use of otherwise redundant capacity. Examples include British Airways and Virgin Atlantic returning to markets long neglected such as UK-Pakistan, a massive VFR market, or long haul leisure destinations such as the Maldives which have seen a growth in volume.  

Evolving Business Models, Start-Ups And New Aircraft

With order cancellations, deferrals and lease returns, a plethora of cheap aircraft have come onto the market and there have been an increasing number of start-ups seeking to take advantage of this. As I have written previously, low price aircraft alone are not a guarantee of success, a robust business case is also needed. Some start-ups have had to adapt already, others have been delayed in getting started whilst some have had to seek more funding. It’s going to be an unstable landscape of comings and goings for many of these new ventures in 2022.

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We are also seeing the early influence of new generation narrow body long range aircraft, especially Airbus’s A321LR. These smaller capacity aircraft, with significantly lower costs, allow airlines to operate services with much reduced risk. New Trans-Atlantic services using the type have been launched by Aer Lingus, jetBlue and SAS. The importance of this development has been underlined by two large recent orders for the type from Air France KLM and Qantas.

Taking advantage of the range capability in the smaller wide body segment, Qantas will use the Boeing 787 Dreamliner to take its second step into the ultra-long haul market by launching a nonstop Perth-Rome service in June this year.  This represents a return to Italy, a market not served by Qantas for 18 years and which could not previously be operated nonstop. It’s an interesting example of innovation, combining aircraft technology, permitting the ultra-long haul operation, whilst tapping into a massive VFR segment and the probability of capturing a chunk of premium leisure demand. We may see emulation elsewhere if this proves successful, though I believe ultra-long haul will still remain something of a niche.

Digital

The best airlines have learned the lesson of the need for nimbleness and agility. While this may have been born of necessity over the last year, in my view it will become part of the new normal as we move through and beyond the immediacy of this pandemic. We are already seeing increased use of digital technology and AI to enable not only the speed but also accuracy of more frequent changes to timetables and aircraft deployment.

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Plenty Of Problems Remain

New variants or not, there are still plenty of problems to contend with. Government policy consistency with regard to travel restrictions remains elusive across the world and the industry will need to continue its efforts to drive improvement. 

There is the contentious question of slots at congested airports and whether airlines should be forced to use these in the face of diminished demand, potentially flying environmentally unfriendly “ghost flights”, or surrender them to new entrant airlines. It is not by any means a straightforward topic, there are pros and cons for both sides of the argument.

Then, as airlines have raised liquidity or been bailed out by governments, the spectre of growing debts for many in the years ahead and the ability to sustain these, is becoming an ever more pressing question.

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To wrap it all up, as global economic activity increases but supply chain challenges remain, fuel prices have risen to their highest levels in around four years and other inflationary pressures are creeping in.

With luck this will be a year of improvement and airlines will be able to build on their learnings and innovations over the last twelve months but it will nevertheless be a year to test management mettle with a cornucopia of challenges.

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