On July 10, the UK government lifted its 14-day quarantine rules for arrivals in England returning from countries included in the exemption list. But while concerns over cash remain, airlines are continuing to reduce costs – a key priority to remaining operational.
“We have turned into real cash management-focused mindset across the company,” says Owain Jones, managing director of WizzAir UK.
To avoid bankruptcy, new strategies are being adopted by airlines to minimise expenses.
“The challenges are going to be related to preserving the cash flow when trying to operate in a world where your revenue is much lower,” explains Laurie Garrow, co-director of the Centre for Urban and Regional Air Mobility at the Georgia Institute of Technology in Atlanta.
“There are a lot of strategies the airlines have been doing. One of them is ‘active preservation mode’ on the aircraft. This means that airlines have parked many of their planes but they have not taken them out of service, so a lot of this is enabling the airlines to defer maintenance.”
Other are deferring long-term capital projects, retiring inefficient aircraft fleets, voluntary buyout packages, and reduced working hours, according to Garrow.
On June 24, Lufthansa and the Independent Flight Attendants’ Union (UFO) agreed on a crisis package including voluntary measures to cut down working hours and the suspension of pay increases.
“The other thing that’s become clear is that many of the airlines expect to come out of this smaller,” says Garrow.
Still, some airline companies are expected to disappear in the new year.
Download our Whitepapers
“Many travel businesses went into 2020 not in as good financial shape as they could have been. If they can’t get their fair share of this reduced market, there will be casualties because as capacity reduces and demand reduces, overhead must be reduced to suit,” says Ian Bell, partner and head of travel and tourism at RSM.
“There will be businesses that will struggle to survive undoubtedly.”
VisitBritain has forecasted domestic tourism spending to decrease from £75.9bn in 2019 to £39.2bn in 2020 – a loss of £36.7bn caused by the impact of the pandemic.
For airlines such as WizzAir, the lifting of the restrictions in the UK has undoubtedly been welcomed as it enabled the company to open routes for the summer.
“It’s great that we got to the position where we can see those quarantine rules starting to be loosened for certain European countries. In response to that, we already have a new number of new routes which we had planned to launch including Spain and the Greek islands. It’s a very welcomed move,” says Jones.
Ryanair and Loganair declined to comment.
Airline companies have welcomed the easing of quarantine measures, but financial risks remain, according to accountants.
“This is a welcomed change but clarity isn’t there at the moment and the risks of having to operate within a changing environment with an industry that is difficult to turn on and off are going to make it a very challenging few months,” says Bell.
“All travel businesses will recognise that the industry that went into lockdown will not emerge in the same way.”
The travel industry is facing a severe drop in demand – despite bookings slowly picking up.
A study conducted by the IATA indicates that 45 percent of travellers would resume travelling within a few months of the pandemic subsiding.
“Now the world slowly opens up and SAS opens up with it. We follow the market closely and the fact that we are setting up new routes also means that there is a demand. At the same time, both traffic figures and our production show that we are far from a normal summer,” said John Eckhoff, head of media relations at Scandinavian Airline Systems (SAS), via email.
SAS experienced a 91 percent drop in capacity and an 86 percent decrease in the total number of passengers, compared to 2019.
“Despite countries starting to re-open their borders, the ramp-up phase for the airline industry is expected to last until 2022 before demand reaches pre-coronavirus levels and is subject to considerable uncertainty,” said Eckhoff.
Garrow says there is a “modest increase in travel” but the industry is looking at “a multi-year recovery.”
“We’re so far below where we were on demand a year ago that we are hopeful the trend will continue. We’re looking at a one to three-year recovery back to pre-coronavirus demand levels,” she adds.
The IATA estimates the airline industry could lose $84.3bn in 2020 due to combined factors including low passenger demand and decreased passenger revenues.
Bell yet says the biggest challenge for airline companies will be the renewal of their Air Travel Organiser’s License (ATOL) by the Civil Aviation Authority (CAA) in September.
The ATOL offers a financial protection scheme for air package holidays that are sold to customers by travel businesses based in the UK. This means that if an airline company enters bankruptcy, passengers are entitled to a full refund under the ATOL protection.
The renewal of licenses could be “a real watershed for the industry to see who is going to survive into 2021,” says Bell. “Discussions will already have started with some of the big businesses with the CAA because the CAA doesn’t give out licenses unless it is comfortable.”
In September, the CAA will publish the list of businesses that have applied for the ATOL license, which will be a “fair indicator on how bullish the industry is in terms of businesses and how they believe the capacity within the market is developing,” adds Bell.
“An expectation would be that the ATOL licences that were applied for will demonstrate a lower intended passenger number.”