PEAK AVIATION: WAS 2019 THE BEST YEAR EVER FOR COMMERCIAL AVIATION?

Is this the end of life as we know it?

As one of the Partners at MIDAS Aviation, I’ve spent the past 5 months looking at the slow-motion crash that is the aviation sector, searching for glimmers of recovery. I’ve been providing a key client with weekly updates for wider distribution that show just where airline capacity is this week versus the same week last year. As we observed, scheduled flights all but disappeared, and then have made a slow and gradual come-back. Throughout, the underlying question seemed to be how long will it be until we get back to where we were before covid-19. 

As we moved into the summer season in the northern hemisphere, the timing of a hoped-for recovery has been pushed back. No-one is talking about the end of the year any more. There has been recognition that the dismal summer will leave airlines in a fragile state to face the winter, and some, like plants exposed to frost, won’t make it. With my colleagues, I started talking about recovery in 2021, then 2022, then by July we found we were talking about recovery by 2024. A week later IATA[1] was saying the same thing and revised its forecasts accordingly.

Now, a few weeks on, and with the benefit of some slower weeks as those around me have taken well deserved breaks, I’m wondering if we haven’t yet begun to realise the scale and depth of what is unfolding for commercial aviation. I find I’m asking myself the unthinkable. What if 2019 was the zenith for global flights? Could it have been the high-water mark? Might we never see 39 million commercial flights take to the skies in a single year again, and sufficient seats to carry 5.8 billion travellers? 

Why the pessimism? What I see when I stop working, and look around at what is happening is the possibility for some very real and long term changes in travelling behaviour. Like everyone else, I know I’m living in my own particular bubble, but if the changes I see taking place are happening everywhere, or even in many places, then they have the potential to seriously disrupt air travel over a much longer term.  Feel free to disagree and give me your perspective from your bubble and from wherever you are.

Forces for change

There are three main patterns of behaviour which I’m seeing which have led me to question the future for aviation.

The first is the ability of technology to replace business travel. This has been talked about for decades. Indeed, early in my career, some decades ago, I undertook research which looked at the reasons why video-conferencing couldn’t replace face-to-face meetings and the answer was always that more communication begets more communication. The more we communicate the more we want to communicate in all forms. More video conferencing would lead to more face-to-face meetings, just as more face-to-face meetings generated the need for more phone calls, emails and virtual meetings. But has that changed for good? If so, a vital element of the legacy airline business model might be in the process of being swept away.

The second is that while concern about climate change has been widespread, it has only been a marginal fringe of concerned citizens who have been willing to change their flying habits - until now. The loss of air travel was only perceived in terms of the downside. Now, however, in this five month social experiment that has been lockdown, many of us are finally finding what work/life balance might really mean. If we have just proved that many of us don’t need to work in an office, and we don’t need to commute, then we are free to live in the places that make us happy. We no longer need to get away. Here is the upside that complements the arguments for not flying. 

The third and final factor that I’ve been pondering is the new population projections published in The Lancet in July. The Lancet is a medical journal and the clever folk there have taken a fresh look at mortality, fertility and migration with some stark results. They conclude that peak population will occur rather sooner than we’ve been expecting. If global predictions of ever-growing demand for aviation have been partly based on there being more potential flyers, then this assumption looks in jeopardy, at least over the long term.

Where is the data?

As an analyst I rely on data but all of us in the industry have been looking for new ways to interpret the data we have, especially when there is no precedent for what we are going through. I’m fortunate in that I have access to airline schedule data (capacity and flights) and traffic data (passengers and fares), as well as data about forward bookings and cancellations. These have been my bread and butter since March. But they can’t entirely predict the future. That’s why we’ve seen a plethora of traveller sentiment surveys launched. Do you feel safe to fly? When might you next fly again? These are the questions everyone is asking. But there is no reliable data to say whether business travel will return. So, I’ve asked some friends. Call it small-scale crowd sourcing.  Their responses may be anecdotal but if they are in any way typical then we are in trouble.

Living as I do in the South East of England, I’m aware that my life is not necessarily typical. I live in my own bubble as much as anyone. Many of the people in my bubble live here, like me, partly because of the easy access to London as well as both London Heathrow Airport and London Gatwick Airport. Many of them travel a fair bit for work. For this article I picked the 5 people I know where I live who travel overseas most regularly for work, and I asked them how they thought business travel would change for them. It’s not a statistical sample but it makes for interesting reading. Some names have been changed at their request.

Adrian - provides training for the Financial Services industry and his clients are based all over the world. He took 15 business trips by air last year, of which 9 involved long haul air travel and the remainder were in Europe. The short haul trips are usually in Economy class while long haul trips are flown in Business Class, or occasionally First Class. 

Kate – is a Principal with a global law firm. She took around 22 flights with British Airways last year, of which half were long haul and half were short haul. She usually flies in Business Class or First Class for long haul flights.  

John – a mathematician by background, is a Partner in a software start-up, and his work is mostly focussed on sales of risk modelling software in the insurance sector. At one stage in his career he was flying almost weekly but now it is less frequent and mostly within Europe. He is home working for the foreseeable future.

Peter - works on strategy and business development for a global resource company. He travelled long haul on business roughly twice each month pre-covid, flying in business class. 

Seamus – works in strategy and operational research for a very large international NGO. The charity works in 100 of the poorest countries in the world, with a focus on the poorest areas within them. He’s been flying long haul about once a month for 10 years with each trip typically lasting 7-10 days. He only flies economy.

All of this group have moved to home working during lockdown and envisage this continuing for the foreseeable future. They’ve been working as hard as ever, if not harder, maintaining relationships with clients, continuing with business development and delivering services through the use of virtual technology.

Has business travel changed for good? 

Like many of us, Adrian has worked from home since the start of lockdown. In a typical year his training programmes takes him to a dozen countries. But having seen how well the virtual training has been going, his main client recently said that in 2021 they would only need him to travel once. If the group training can be done effectively online then there is no need to fly, and the costs of running the courses are massively reduced. What’s more, by working from home Adrian can now run a course in Asia in the morning and another for North America in the afternoon and still go to sleep in his own bed. 

Peter, a road warrior if ever there was one, would think nothing of flying into Heathrow from one continent, and flying straight on to another for a back-to-back business trip. Having been grounded for 4 months, working from his new rural home, with family close at hand, he now says he will probably reduce his business travel by at least 50% post-lockdown.  What will remain is the external meetings and events which probably made up 30% of his travel needs before; what will go with be the internal meetings.

Adrian and Peter are frequent flyers. They make up a disproportionate number of the people on planes and a disproportionate number of people sat towards the front. According to OAG data, 60 million people flew each way between Western Europe and North America in 2019. These passengers earned the airlines flying them over USD 35 billion in each direction. But while those passengers not travelling on Discount Economy fares made up 33% of passengers, these passengers who pay more for their seats contributed 69% of revenues. 

So, imagine what happens if our frequent flyers were to decrease their travel by, say, half? What does that do to airline revenues? What does it do for the economics of flying aircraft, especially for legacy carriers? Is the legacy airline business model even possible without this group of passengers who both fly a lot and pay higher than average fares? 

The impact of a loss of premium air travel may not affect every airline the same, of course. In a comparison of four major network carriers, British Airways, Emirates, Lufthansa and Singapore Airlines, Lufthansa has the highest proportion of passengers sitting forward in the plane, on both long and short haul routes. Around a third of all their passengers are sat somewhere other than the Discount Economy area of the aircraft. A similar proportion can be found in premium cabins on both British Airways and Singapore Airlines on long haul routes. 

[1] https://www.iata.org/en/pressroom/pr/2020-07-28-02/

While the loss of passenger traffic is bad, business travellers these often those paying more for their seat. Last year the typical average fares for a passenger travelling in Business Class on British Airways was more than 10 times as much as the for the Discount Economy traveller. First Class fares appear lower but that’s just because so many seats are used by those burning airmiles.

Can Zoom replace corporate travel?

I asked Kate if she thought reducing business travel by half post-covid was a reasonable estimate. She thought her own reduction in air travel might be more. It’s not that she doesn’t enjoy travel for business, she does, but at a personal level she’s enjoyed being able to routinely eat dinner with her children and she wants to make that change more permanent. While the amount she flies will change, she expects the bigger change will be the ability to work from home rather than an office. For her, the business travel that will disappear will be the internal meetings, where partners are brought together. The last few months have highlighted the cost – indulgence, almost – of these meetings. Where she does have serious concerns is the impact on business development if meetings can’t be done face-to-face. For her the ‘corridor conversations’ and informal gatherings are an important part of working with clients and winning new business. no longer possible. She’s concerned that the forms of communication which are rapidly becoming the norm  -  Zoom, Teams, Google Hangouts, GoTo - are very transactional; every meeting is scheduled and no-one simply picks up the phone to have a chat.

Peter recognised the transactional nature of the video conferencing technology but says that now they understand that more, managers are making a deliberate effort to start work meetings with a more personal update. We are all new to this but the issues are not insurmountable.

Similarly for Adrian, the downside of undertaking training remotely is that it’s harder to read people’s faces and body language, look over their shoulders when doing exercises, listen to their conversations, get their feedback and build up social relationships over coffee and lunch breaks.

While this technology that has been used to keep us all communicating over the past months is not exactly new, the speed with which businesses have transformed their use of it is. We have seen years of technology upgrades compressed into weeks. Several of my friends believe that even a year ago they couldn’t have replaced face-to-face meetings quite so effectively and efficiently as they have been able to do this year. 

All around us, there are people asking what is possible and others with an appetite to bring about the changes needed. I recently participated in my first virtual conference and the experience was only positive. I could move between the main stage and panel discussions in side rooms without the awkwardness of getting up and being seen to physically leave a room, or squeezing past people sat along from me with their papers and phones balanced on their knees.  I could spend time on our virtual stand having engaging and open conversations. There was no longer a sense that those standing anonymously on the periphery were eavesdropping on someone else’s conversation; rather they were welcome to listen in and make themselves known at any point if they wanted, or just listen and learn in the background. 

That’s not been Kate’s experience. A virtual conference for her provided no opportunities for engaging outside the formal panel. But it’s still early days in making this technology serve our needs and the speed of change shows what might be possible.

What many businesses are realising is that the two days out of the office to meet a client for an hour, now just takes an hour. My friends have enjoyed regaining plenty of time for them and their families through not commuting or travelling on business, but say their workplaces are also realising the time waster that can be business travel. And then there’s the cost. As John has found, if business travel has previously been justified by the need for sales to be conducted face-to-face but sales results have held up through this period, then can the cost line item attributable to air travel still be justified? In an environment where many companies are still uncertain about the future, can we be sure there will be a rush back to business travel once a vaccine is in place and fears about travel dissipate? The lesson, perhaps, is that business travel is both costly and disruptive and may be optional. Technology can now provide a viable alternative.

The new work/life balance

The experience of working from home has not been the same for everyone. No-one has appeared more stressed over these past months than those visibly juggling work and home schooling from a kitchen table. But there are many, many people, especially in the area where I live, who have happily given up 90 minutes of commuting on a crowded train to and from work each day and can use the time to spend more time with their family. 

For Kate, dinner with her girls was a rare thing and she doesn’t want to lose this. Less air travel will help. When I asked if it might be realistic to think her air travel might be halved in future she indicated that it could be reduced by more. While she doesn’t think she’ll return to the amount of air travel she was doing, the biggest difference for her will come from not having to travel to an office to work. Her firm is opening up a limited space in the office in September but she’ll work from home for the foreseeable future. That means much of her day-to-day communication will stay online. 

Adrian too has found upsides from working from home. Now when a course finishes at 5pm CET on a Friday his weekend can start, rather than being delayed by the process of travelling home which might involve a coupe of trains to an airport, security queues, a delayed take-off, circling Heathrow, more security queues and then a bike ride back from the airport.

Many of us have used lockdown to explore our neighbourhoods more. We’ve seen innovative businesses emerge to meet the needs of home workers. For me that’s a local pub opening a yurt which serves as a coffee shop offering home-made cakes through the day, alongside an outside bar for the evenings. People have joined WhatsApp groups to offer help to neighbours and found in the process that they’re getting to know more people in their community and enjoying where they live more. 

Will the new work/life balance mean that people put greater emphasis on being close to home? Or will the fact that home-workers can live anywhere with decent broadband connections means that more of us will choose to live in the places that make us happy. Bermuda is just one of a number of countries which has started offering visas for remote workers – or digital nomads - interested in living on the island for a year[1][2].

For John, it looks likely that his business will see staff working from home for over a year. If it takes 6 weeks or 3 months to establish new habits then by the time they are ready to return to office life, new patterns of work/life balance will be firmly entrenched. Communicating remotely will absolutely be the norm. Who knows what that does to business travel?

For an international NGO the perspective is rather different. Work/life balance takes on an altogether larger perspective. As a values driven entity, Seamus’ organisation had been concerned about the environmental impact of work-related travel for some time and were in the process of writing an environmental stewardship policy before covid-19 hit. Now there will be no international air travel until at least January 2021 and after that the travel policy is likely to be fairly stringent. In many ways the organisation was well prepared for the change; they were already tech-savvy and had been using virtual meetings for 15 years but for Seamus while most of his role can be performed remotely, there is a quality cost for activities such as facilitating training sessions and workshops when they are not face-to-face. He expects his use of long-haul air travel to reduce by around 90%. 

The impact of population decline

Last year was possibly the first time I have worked on a long-term air traffic forecast where there was a need to explicitly recognise that long term population decline might impact air travel. The forecast focussed on the Japanese market where it’s been known for some time that the population is declining. Long term forecasts are often looking 20 or 30 years ahead, a timeframe relevant for the building of major infrastructure projects, such as airports. So, understanding long term trends is vital. While propensity to fly has been growing, can it keep doing so. At what point does fewer people means less travel. 

Globally the go-to source of data on population trends has been the United Nations data. Their 2019 projections point to a global population of 9.7 billion by 2050 and 10.9 billion by 2100. While 2050 may seem a long way off, it was only 30 years ago – the same number of years – that the A380 aircraft was announced by Airbus. In contrast, the projections published in The Lancet[3] in July combine the effects of mortality, fertility and migration. And it’s shocking.

The headline figures are for global population to peak at 9.7 billion in 2064 and then decline to 8.79 billion by 2100. Countries such as Japan see their populations halve between a peak on 128 million in 2017 to 60 million in 2100.

[1] https://thepointsguy.com/news/countries-offer-remote-working-abroad-option/

[2] https://www.forbes.com/sites/laurabegleybloom/2020/07/30/live-work-remote-move-abroad-coronavirus/#278a190d3381

[3] https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)30677-2/fulltext

Spain sees a similar reduction with its population peaking at 46 million in 2019 only to fall to 23 million by the end of the century. South Korea. Brazil. China. India. All see large declines in population by 2100, according to the study. One of the disturbing features of this projection is that for some markets, the peak population is behind us and for others, such as China, it is only a few years away. Having spent plenty of time analysing the impact of the vast Chinese outbound market potential, it is sobering to consider that the population may only be a few years away from its peak even if there is plenty of room for travel growth due to rising disposable incomes.  

Where is aviation headed?

We already know that without recovery through the summer months the airlines enter the traditionally more difficult months of the year without the cash reserves needed for leaner periods. Back in June IATA was projecting a USD84 billion loss for the industry in 2020 but that was when there appeared more hope for some sort of recovery in the Autumn.  However, capacity growth appears to have plateaued so maybe we are now looking at an incredible USD100 billion loss – or more.

We’ve already seen a number of airlines go into bankruptcy measures, and no doubt more will do the same. While governments around the world have stepped in to help, surely the prospects of a 3 or 4 year wait until recovery will make them think twice about further bailouts. But what if it takes far longer than that for the industry to get back on its feet? What if demand for business travel as we’ve known it never fully returns? What if what is needed by the legacy and long haul airlines is a complete reinvention based on a massive reduction in the number of businesses willing to support the volumes and fares demanded in the front of the plane to keep the business model working? 

After the financial crash a decade ago many people said things would never be the same again. Of course, global markets did return pretty much to how they were although banks had to accept a tranche of measures to ensure they were properly capitalised so they were more resilient to shocks. So maybe this period has been a blip where many people thought things would change but in the end the desire to travel will still be there. 

As I look ahead I see a very rocky road for the legacy airlines. Not only might a significant chunk of business travel demand evaporate, but whole swathes of the customer demographic may decide flying is not for them. Think of the silver surfers we’ve been accustomed to seeing jetting around the globe in retirement; now among the highest risk categories for covid-19, will they want to fly? 

Low cost carriers, especially those that went into 2020 with plenty of cash, may come out of this in a position to expand their networks if they haven’t annoyed customers through a combination of delayed refunds, inflexibility about changing flights and lack of social distancing on aircraft. I call this the ‘Ryanair wins’ scenario. But what will be the options for people wanting, indeed needing, to fly long haul? Might we see a more differentiated airline product with specialist airlines focussing on premium markets? While the long-haul low cost model has been a fragile business proposition since the start, is any form of long haul travel for budget travellers going to be possible if the legacy carriers can’t subsidise it with their business travellers?

And then what of concerns about the environmental impact of aviation? Until now aviation has been one of the few industries which has not had a clear path plotted to a zero carbon future. There’s nothing in what I’ve written that presents itself as a part-solution to climate change other than the possibility of a sustained reduction in demand for air travel. Will the voices that want to restrict aviation growth become louder having had a taste of what is possible? 

I end as I started with some questions. I don’t have all the answers but what do you think? What are the frequent flyers you know saying about the future of their air travel? Do you have another angle on this topic, or ideas about what might happen to business travel as the world learns to live with covid-19. 

- Becca Rowland