POSTS
How Airlines Are Getting Creative During Covid-19
By now, you may have heard of the coronavirus that is wreaking havoc of the world’s economy and has lead to over a million deaths worldwide. The seriousness of the COVID-19 pandemic cannot be understated and people must adapt to overcome and eradicate the virus. Similarly, firms and industries are forced to be innovative in order to overcome the impactful storm caused by from COVID-19.
Perhaps no other industry has been impacted by COVID-19 more than the airline industry. Air traffic came to a screeching halt in March with the enactment of border closures and stay-at-home orders across the globe. Although the US government provided airlines a $25 billion grant as part of the CARES act passed earlier this year, it would not be enough to keep airlines from massive layoffs nor ease the pain of high cash burns.
With low passenger counts and continuing operating costs, airlines have been burning through millions of dollars per day since the start of the pandemic. The International Air Transport Association (IATA) reported that airlines are expected to burn through $77 billion in cash during the second half of 2020 and should continue into 2021. With that said, airlines are starting to get creative in their operations to limit the financial hemorrhage from COVID-19.
The first actions that airlines took were focused on the health and safety of passengers. Airlines immediately put sanitation protocols into place that required meticulous cleaning before and after each flight, mask mandates, and social distancing, all of which align with new CDC guidelines for air travel. Some airlines even started using disinfectant fogging sprays to more effectively cleanse the plan of potential contaminants. These new mandates are meant to make air travel safer, but implementing new processes while operating efficiently can be cumbersome. That is why one Brazilian airline, Azul, started using technology and digital projections to expedite passenger onboarding while remaining socially distant. Delta also changed its onboarding process to limit human interaction by only allowing a small section of rows to board at a time, starting with the back of the plane moving forward.
In addition to prioritizing the safety of their passengers, airlines are rethinking their revenue strategies and cost structures to ease the burden of COVID-19. Traditionally, airlines have used yield management to price fares, but the pandemic forced airlines to pivot to price for passenger volume. Furthermore, airlines have revoked their change fees to win back travelers and ease people back into booking flights, all while trying to increase their cash on hand. Airlines are also strategically ramping up new seasonal routes to boost potential revenue streams. JetBlue recently launched new routes from New England to Colorado ahead of its ski season, along with the addition of flights to the Caribbean to take advantage of a leisure travel crowd that is expected to increase during the winter months.
With few to no passengers on many flights, airlines started leveraging the empty space normally filled with eager travelers with shipping cargo. Passenger airlines typically allocate a small portion of their holds for cargo, but now some planes are 100% cargo transports. United Airlines recently reported nearly a 50% increase of cargo revenue in Q3 2020 compared to Q3 2019. Cargo revenues across the industry are expected to reach record levels for passenger airlines due to the increased volumes, increased demand, and higher shipping rates during the pandemic.
In order to raise funds, airlines are starting to think outside of the box. Delta recently announced it was collateralizing its frequent flier miles program, Skymiles, to borrow $6.5 billion in funds. It is common for airlines to collateralize assets like their fleet, but leveraging their loyalty programs brings another entire set of questions. The Financial Times estimates that Delta’s loyalty program is valued at $26 Billion, well above Delta’s market cap. Considering people are still spending on their credit cards, Delta and other airlines have also considered selling discounted miles to banks in order to prop up their cash reserves.
Lastly, there are a few notable, creative ideas from airline companies that have encouraged passenger “travel.” Airlines in South Korea, Japan, and Australia are offering “flights to nowhere” with passengers paying hundreds of dollars to take off and land at the same location. One QANTAS flight sold out in 10 minutes! Singapore Airlines has created an upscale restaurant onboard its largest airplane for passengers to dine without ever leaving the tarmac. Given that the dinner may only cost $40, this will hardly help airlines revenues rebound to normal revenue levels, but will reignite the flame that avid travelers are missing - the feeling of escape.
Airline volumes may take years to return to pre-Covid levels and airlines have already downsized their workforces by tens of thousands of employees. The damage that the COVID-19 pandemic has done to the industry is unfathomable and we can only hope that firms in the industry are able to survive it. Creativity and ingenuity are no longer just beneficial for airlines, but absolutely fundamental to their long-term survival.