Commercial Aviation: Flight is Delayed

Commercial Aviation: Flight is Delayed

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At the initiative of ATO Events company, 350 aviation experts and representatives of financial organizations have recently taken part in a video conference to discuss an acute issue of how commercial aviation will operate in the future.

The current situation requires constructive dialogue more than ever, as 70% of all the commercial aircraft in the world are on lease. It is equally important for each party to find a way out of the current force majeure circumstances.

According to Natalia Orlova, head of Alfa Bank's macroeconomic analysis center, recovery from the pandemic might be not so bad in terms of economic development. In her opinion, the media are overpainting the picture, while the real situation is not so frightening. Bank analysts believe that in the second quarter of 2020, economic activity in Russia will see and 8% slump. At the end of 2020, GDP is likely to decline only by 2% to 3%, and the personal income will decrease only by 5%. In March, the unemployment rate in Moscow was estimated at 4.7%. It rose up to 7% over the month. Therefore, in the worst case scenario, the unemployment rate might be 10%. It is believed that, firstly, the crisis hits the small and medium-sized businesses. In this regard, Russia is in a stronger position compared to other countries, as only 25% of the economically active population work in this sector. Elsewhere in the world, its share elsewhere in the world is up to 70%. Negative expectations in terms of the fall of ruble are not a reason for panicking either, as it remains at an “acceptable” level.

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Certainly, as people are unable to fulfill their plans due to restrictive measures, customer behavior has changed. According to Orlova, as soon as the quarantine is lifted, mobility will be restored. However, she believes that amid the growing social expenditures, stimulation of the population’s mobility through subsidies will not be a priority for the government. In the contest of the COVID-19 pandemic, the essentiality of financial assistance to the people is moving to the forefront, but social payments might slow economic growth by 3-5 years.

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The crisis is likely to create demand for new technologies. Chances are remote work and online shopping will become commonplace while traveling will be a great luxury. To prevent a second coronavirus wave, any trips will have to be minimized. All countries will more likely have to reduce cargo haulage and passenger services rather than develop them.

Meanwhile, online surveys organized by ATO Events during the conference showed that the audience did not believe Orlova’s optimistic predictions. At least a half of experts who took part in the survey expect that a third of Russian air carriers are likely to abandon the market. According to them, it might take five years to recover from the crisis in the best case scenario, and the performance indicators of this segment will be close to those at the beginning of this century. Only less than 1% of the respondents are confident that the industry will be back on track within a year.

The analysis of the Russian Association of Air Transport Operators (AETO) doesn’t inspire optimism either. Passenger traffic at the Russia’s largest airports fell 95% in April while the global air traffic went down 80%.

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Pavel Piskun, head of leasing department at Sberbank, is ready to discuss long-term delays of leasing payments, too, although he believes that it is hardly reasonable to allocate money indiscriminately. The uniqueness of a company and its ability to match the market demands that other operators are not able to are the criteria to decide on whether it is entitled to state support or not. The case in hand is the social significance of carriers' presence in remote regions.

The previous crisis where the number of air travelers significantly dropped due to terrorist attacks in the U.S. and around the world shows us that the decline lasts about two years. Then people get used to the new reality. At that time, world aviation took unprecedented security measures against terrorist threats – X-ray machines scanning luggage and sweeping preflight inspections of passengers appeared at the airports. At present, large-scale measures could be taken in order to curtail the spread of coronavirus infection -- face masks, gloves, “health passports,” COVID-19 testing, remote boarding of passengers and aircraft disinfection. These ideas have been voiced, and some of them have already materialized on domestic flights in Russia. According to the most “cautious” scenarios, international flights are expected to be resumed by next summer.

However, the International Air Transport Association (IATA) has decided to intervene in the situation. Its representatives appealed to the state governments to provide financial support to airlines, as there is no other way to save them from bankruptcy today.

Strictly speaking, even before the pandemic, commercial aviation stood in need of state support. Regional airlines are unprofitable not only in Russia. They have been always funded from state budgets. Yet today they need multibillion-dollar injections. Obviously, not all states are ready to do it at no charge.

For example, Germany’s Lufthansa was offered 9 bln euros in exchange for the government participation in the airline’s management. As a result, its top executives are considering an alternative option which is to declare bankruptcy.

The U.S. government is allocating $58 bln from the budget and is eyeing participation in the airline industry. At the same time, well-known billionaire Warren Buffett, whose financial instincts are heeded by all investors in the world, has sold shares in the four largest U.S. airlines for $4 bln. According to him, the companies are going to “chew up money in the future.”

“Today, fixed expenses are the main financial burden for the air carriers. They are the leasing fees, technical maintenance, salaries and social contributions,” says Boris Shokurov, Deputy Executive Director of Russian Association of Air Transport Operators (AEVT). “Last year the costs in the industry amounted to 640.5 bln rubles ($8,941,380,000.) And now, against the background of zero consumer demand, they are turning into a heavy yoke. Losses totaling 176 bln rubles ($2,456,960,000) were incurred in the first quarter of this year. Notably, the debts of airlines will not decrease if the payments are rescheduled or restructured. Therefore, the debt repayment remains in question.”

As the industry recovers from the pandemic, it is important to consider cancelling VAT payments to airlines in addition to regulatory, monetary and fiscal measures. According to Shokurov, this will help avoid the growth of air transportation costs in the conditions of low solvent demand on the part of customers.

Moreover, international commercial airline operations are out of question for next year. Domestic fights are more likely to reach the level of 2008 – a total of 31 mln passengers.

Although UTair got into the priority list for government support, it has not yet received any money, complained Dmitry Belokon, UTair vice president. According to him, deferred payments will not save the company as it will have to pay the monies one day or another all the same.

However, the idea to use civilian aircraft for cargo transportation might work. Removing passenger seats and ensuring their safety does not require much money and will make possible provisional diversification of business activities, will keep the personnel and bring in revenues.

By the way, the Ukrainian airline UIA has gone this way. Federal Aviation Regulations (FAP-246) permit cargo haulage in the passenger cabin, if it meets the recommendations of aircraft manufacturers, weight restrictions, cargo locations, fire safety and balance calculations. The Federal Air Transport Agency (Rosaviatsiya) has responded to the requirement of the time very quickly. Seven airlines have already received permission to carry cargo in the passenger cabins after getting air operator's certificates (AOC.) So far, Aeroflot, Ural Airlines, Russia, Pegas Fly, Royal Flight, Nord Wind, and AZUR air are on this list, but it can be expanded.

How do experts estimate if a company is a going concern? According to the Analytical Credit Rating Agency (ACRA), several criteria are taken into account -- whether it is a monopolist or an obvious market leader, what the share of domestic flights is, if the seat occupancy is more than 80%, etc. The factors like successful anti-crisis experience, low share of loans, and the ability to resume the level of pre-crisis operations are also taken into consideration. Airlines that meet these conditions will be able to recover from the crisis after the pandemic.

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Flexible aircraft fleet management is one of the survival factors, too. Mostly, the crisis has hit wide-body aircraft. Vadim Fokin, Embraer’s representative, believes that narrow-body aircraft with small carrying capacities will be in demand in the first place. Embraer is the third largest aircraft manufacturer after Airbus and Boeing. Currently, it produces 100 aircraft per year and it expects an increasing demand in the future. As part of the anti-epidemic measures, new interior trim materials that will be easier to disinfect may be proposed for consideration. In Russia, S7 is Embraer's largest operator, while in the post-Soviet space it is Air Astana (Kazakhstan) and Belavia (Belarus.)

Unfortunately, on the background of COVID-19 pandemic it is the aviation industry that was affected most severely. Experts have made an attempt to predict how this sector might recover from it. Only time will tell whether their predictions are correct.

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