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M. Ray Perryman

The Economist: Friendlier skies

Business
Wednesday, January 20, 2021

One of the industries hardest hit by the pandemic has been airlines. The sharp decrease in demand for air travel due to shutdowns and safety concerns has severely crimped revenues and profits. Companies are struggling to maintain service and, in some cases, to survive intact.

According to Airlines for America, 2020 US airline passenger volume was down 56% domestically and 66% internationally compared to 2019. Airlines responded by decreasing the numbers of flights; domestic departures fell 38% and international dropped 45%. Through the third quarter, US passenger airline operating revenue had experienced pre-tax losses of $36 billion.

Maintaining air travel infrastructure is essential to both long-term economic sustainability and quality of life. Relief was provided by the CARES Act, which included $25 billion for airline payrolls as long as layoffs were not implemented through September 1. However, as the pandemic dragged one, airlines were forced to lay off personnel following the end of the stimulus.

The latest bill included $15 billion for passenger air carriers and $1 billion for contractors for direct payroll support to protect the jobs of pilots, flight attendants, mechanics, gate attendants, and other personnel. To qualify for funds, airlines must agree to not reduce pay or benefits or furlough any employees through March 31 as well as recall employees that were furloughed following the end of the earlier stimulus. This aid could have a significant impact in maintaining airline employment going forward.

Of greater significance, the pandemic will likely have long-term effects on the industry. Business travel has been particularly hard hit and has been slower to rebound, as companies have scaled back travel and moved many meetings and conferences to virtual settings. Estimates of the permanent reduction in business travel are as high as 36% (although we project it to be less dramatic). Business travel is a key component of airline revenue (typically around 30%), and higher-priced corporate trips tend to subsidize cheaper leisure fares that fill marginal seats. Less business travel could lead to pricier leisure fares or fewer available seats and flight options.

Airlines will also have to continue to seek opportunities to manage costs. In addition to reducing flights, some have retired older aircraft, increased cargo business, and taken other steps designed to enhance efficiency. Companies have taken on unprecedented amounts of debt, and credit ratings have been negatively affected.

With vaccination deployment and enhanced therapeutics and safety measures, demand should begin to increase later this year, though a surge is not expected. Pent up desire among leisure travelers will likely be the primary initial source of stimulus.

Airlines are essential to global efficiency and will be ultimately restored to strength. The path will likely be rocky, but navigable. Stay safe!!

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com), which has served the needs of over 2,500 clients over the past four decades.

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