Commentary: Airlines have it bad with COVID-19 but airports have it worse
Hub airports like Singapore’s Changi Airport and Dubai International Airport, in particular, may not recover that quickly, says Nitin Pangarkar.
SINGAPORE: The spread of the coronavirus has had a tremendous impact on the travel industry.
With a vast majority of flights grounded to stop the international spread of the virus, major airports like Singapore and Dubai have seen passenger volumes plummet.
Airports continue to incur fixed costs for maintaining the infrastructure. Their burden is even greater because partners such as retail outlets and airlines have been given breaks in terms of rentals and reduced parking and other fees, respectively.
Though governments might share the costs burden of airports in the short term, it remains to be seen how long they will stomach such a responsibility.
A BLACK SWAN EVENT THAT HAS ONLY GOTTEN WORSE
Admittedly, the current crisis was a black swan type of event that could not have been anticipated.
It was barely a few months ago in December 2019 that the International Air Transport Authority (IATA) had predicted profits of US$29.3 billion for airlines in 2020.
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We should anticipate that, going forward, the future will be very challenging for airport hubs like Singapore and Dubai because the air travel industry may take a long time to come back to the passenger volumes it enjoyed before the eruption of the pandemic.
There is a distinct possibility passenger volumes may never return to pre COVID-19 levels. Even the financially strong Changi Airport (with share capital and reserves at S$3.54 billion and retained profits of S$4.29 billion in the last financial year) is treading carefully.
Changi Airport announced on Tuesday (May 12) it will suspend Terminal 4 operations until a sufficient number of flights resume at the terminal. It had earlier announced in April a suspension of Terminal 2 operations for 18 months.
The huge uncertainty has shaken projections of the prospects for air travel. In March, based on a scenario of extensive spread of the virus, IATA projected a 19 per cent loss in revenues for airlines in 2020, equating to US$113 billion. They revised that estimate to US$314 billion barely a few weeks later.
According to a Dollar Flight Club survey, as many as 60 per cent of consumers in the US feel comfortable travelling internationally in the second half of the year, if travel restrictions are lifted. About 45 per cent have a trip booked and have not cancelled yet.
The same source predicted a 35 per cent decline in prices through 2021, and a 27 per cent increase on average through 2025 (versus the base of 2020 prices).
WORSE THAN THE GLOBAL FINANCIAL CRISIS
Some of these projections were based on the experience of the global financial crisis and the 9/11 attacks but I remain far less sanguine about the prospects of air travel in general and airport hubs in particular.
A unique aspect of this coronavirus crisis is that it is primarily a public health crisis, which will leave psychological scars on the health risks of traveling and potentially catching the virus.
Even if the mortality rates turn out to be low in the long run, public perceptions about the health hazards of COVID-19 may not change quickly or easily.
Although cooped-up-at-home leisure travelers are keener than ever to ditch the growing cabin fever and go explore the world, they are unlikely do so if it jeopardises their health, not to mention if traveling involves them being quarantined for weeks once they’ve touched down at their destination.
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There are also two additional factors at work.
First, although youths travel the most out of any given demographic, the elderly form a sizable proportion of leisure travelers who take longer vacations. Extensive travel forms an important of the retirement plan for many retirees.
Regardless of the overall mortality rate of the COVID-19 virus, there is an overwhelming scientific consensus the virus is more dangerous if seniors contract it. If the elderly stay away from leisure travel, this will affect overall leisure travel demand tremendously.
Second, regulatory policies for travel post COVID-19 are not yet clear. There is a school of thought which argues post COVID-19, airlines will be forced to keep middle seats empty for social distancing.
That is likely to lead to higher prices. Basic economic principles suggest higher prices would dampen demand for air travel.
This dynamic runs against the grain of the last several years, during which airlines were packing an ever larger number of passengers into each of their flights.
BUSINESS TRAVEL ISN’T LOOKING GOOD EITHER
Turning to business travel, I am again cautious about the long term demand and projections of a rebound for several reasons.
First, business travelers typically have to bear inconveniences such as fatigue, lower productivity and jet lag, which are mitigated to some extent because of the greater level of comfort in business and first class.
The threat of jeopardising one’s health will add significantly to the “costs” of these inconveniences. The eventual cost-benefit analysis for many business travelers will likely suggest less air travel.
Second, during the lockdowns imposed in many countries, many businesses and employees would have probably realised that though technological solutions such as video conferencing cannot fully replace the face-to face interaction facilitated by air travel, they impose lower cash costs and inconveniences.
I believe a significant part of the demand for business travel will permanently shift to video conferencing.
Third, in the post COVID-19 world, businesses are likely to be cost conscious because of challenged profitability. Business travel is a discretionary expense that can be easily cut when businesses are looking to save costs.
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BUT AIRPORTS HAVE IT ROUGH
The above analysis doesn’t mean that either leisure or business travel will go to zero. In fact, even a 10 per cent decline in demand will inflict a lot of pain on businesses such as airlines and airport operations, because of their high fixed costs.
Air hubs like Singapore, which depend on transit traffic are even more vulnerable.
According to IATA, planes have excellent filters and frequently refresh the cabin air, thus posing very little risk of catching infections. Airports are another matter though.
If travelers are concerned about catching infections at the airport, they will exhibit a strong preference for direct flights compared to those involving a transit, thus affecting passenger volumes at hubs like Singapore or Dubai.
In fact, airlines might have a few more degrees of freedom to deal with the challenges in the post COVID-19 environment compared to airports.
Some airlines are already going out of business (thus reducing alternatives and competition), the survivors might code-share (thus reducing costs and supply) and airlines might find new ways to charge customers for conveniences that have been taken for granted in the past (for instance, inflight entertainment).
Meanwhile, airports will suffer from reduced passenger volumes even if airlines deal with the new environment through the above strategies – impacting not only landing, parking and other charges they would normally charge airlines, but also airport retail and food and beverage revenue streams.
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THEN AGAIN MAYBE IT WON’T BE SO BAD
There are two caveats to the above analysis. The first relates to how long people will remember the COVID-19 crisis and its health implications.
If public memory is short, air travel volumes might bounce back quickly. But I think that the memories of COVID-19 are going to be long-lasting, though nobody knows the exact answer to this.
Second, coronavirus-related regulations (for instance, rules about middle seats) may not be as stringent as is expected at this point in time.
Post 9/11, people complained about cumbersome additional screening procedures but save for initial grumbling, that did little to dampen eventual demand within a full year.
Still, I think even with these caveats, the future of airports, especially hubs such as Singapore, will be incredibly challenged.
So, what might hub airports like Singapore and Dubai do? I would recommend putting expansion plans on hold.
I would also suggest investing in only those initiatives that lead to productivity improvements and staying away from making airports more luxurious — projects which airports like Dubai and Doha have been undertaking
Finally, I would also suggest avoiding debt financing and conserving capital for rainy days or for a time when the uncertainty about the future of air travel is resolved.
Other than financially strong airports like Changi, other airports use debt financing extensively.
Airports frequently turn to the capital markets to finance long-term construction projects. Bond proceeds are the largest sources of funds for airport capital needs, accounting for approximately 54 per cent of total funds historically, according to the International Civil Aviation Organisation.
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Nitin Pangarkar is Associate Professor in the Department of Strategy and Policy at the National University of Singapore Business School and author of Flying High in a Competitive Industry: Singapore Airlines.