What's next for aviation? Four trends to watch

What's next for aviation? Four trends to watch
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It’s hard to believe now, but the aviation sector was riding a wave at the start of the year. Capital was plentiful and expectations were high that global demand for travel would keep growing. 

Now the industry is operating in a parallel universe. Global air passenger traffic this year is predicted to drop as much as 70 percent from last year, and business travel isn’t expected to return until at least 2024. The market value of big airplane manufacturers and airlines has sagged. 

But while we’re likely years away from a full recovery, the passage of time has allowed the industry to recalibrate and reevaluate business models, market assumptions and day-to-day operations. The following four trends will be important to watch.   

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Business and leisure travel demand will return

Airlines have historically relied on a steady flow of business travel for their higher profit margins. It’s clear the Zoom effect has aided in business productivity during a time when business travel itself has been curtailed (either mandated or by preference). 

But there is still no real substitute for in-person meetings, especially when it comes to establishing the rapport and trust necessary to win new business. 

After all, it was widely predicted at the time of the telegraph, telephone, the fax machine and email that these new technologies would slash the need for travel.  

The opposite occurred. Each one enabled even more business travel. An argument can be made that Zoom and other video conferencing technologies will do the same now. There is pent-up demand for business travel, and we should expect a slow but steady return. 
 
Leisure travel will return as well. One universal lesson we have recently learned is that people need to connect in person — to see family and friends, create memories in new places and simply get out. Ultimately, travel is a global phenomenon that is not going away. It’s a badge of a middle-class lifestyle and an experience that millennials value more highly than goods. 

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Proper government action is crucial

As of the end of August, 81 separate countries and EU-level entities had committed up to $158 billion in support for the airline industry, according to industry reports. Overall worldwide spending on air transport was estimated at $873 billion in 2019.  

Yet governments — including Canada and countries in the European Economic Area and Southeast Asia — have also taken steps to restrict, and in some cases prevent, air travel in and out of their respective countries. Partly health and safety-related, partly political, these government border controls have stifled what limited air travel demand still exists. 

There is no consensus on the proper path nations should take, but it’s safe to say the viability of the airline industry worldwide hinges in large part from a balanced border control strategy that accounts for both needs of safety and openness.

Airlines will experiment with pricing and cost structure
 
The strength of leisure travel rebound will depend, in part, on how effectively airlines can use pricing to stimulate demand. All U.S. airlines are offering domestic fares at discounts from fares offered this time last year, in some cases over 40 percent. With these discounts, airlines are banking on driving people back into seats. If passengers have positive experiences, the airline would have effectively “broken the seal” on their reluctance to travel, giving way to more frequent excursions and positive word of mouth stemming from their positive (and safe) experiences.  

However, to sustainably provide lower airfares, airlines will need to right size cost structures. Reducing fleets to maximize utilization, deferring or cancelling new aircraft orders and monetizing aircraft they own through “sale leaseback” transactions with third-party aircraft lessors are all prime examples of actions airlines such as Delta, JetBlue, Cathay Pacific and easyJet are taking now. Plus, the crisis will push airlines to onboard nascent technologies to help them cut marginal operating costs such as more efficient flight planning (less downtime with existing aircraft), less time on ground in between flights, optimizing fuel management, etc. 

Look for creative ways airlines are shifting operations and cost management which will allow for demand-stimulating pricing and business model innovation.

More airline bankruptcies and consolidations, but also new entrants

Here’s a near certainty: Only the stronger airlines will survive coming out of COVID-19. Those that were well capitalized and well-operated are best positioned to be victors of the consolidation game — a much-needed strategy to weather a multi-year recovery of passenger demand. Other winners include airlines that have coordinated government support. 

The airline industry is no stranger to bankruptcies and consolidations (remember TWA, Northwest, Mexicana and Pan Am), so we should expect orderly restructurings and mergers in the months (and years) ahead.   

But consolidation creates a window for new entrants who are able to start-up at the bottom of the cycle leveraging available surplus skilled labor and assets (aircraft) at their disposal.  

The most popular routes will continue to fly — though they may be with different airlines or aircraft. And with the market participants shifting around, airfare trends and passenger experiences will also change. Passengers shouldn’t expect low fares forever, but we may see a few new airlines “make a run for it” to capture market share through differentiated service offerings.

These four trends illustrate the tensions the airline industry face now and the moves that are being made in response. The airline industry will survive and thrive once again, but how it changes, who the key players will be, what the passenger experience will be and how all stakeholders work to operate in the black will be a fascinating case study in organizational management, competitive positioning, and operational efficiency. And with all of that change, there is opportunity.

Mark Perez is a founding partner of Virgo Investment Group and board member for Zephyrus Aviation Capital.