Industry

Published on May 17th, 2020 | by FII Reader

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Like the Melting Wax of Icarus, the Coronavirus has Flung Aviation back down to Earth

By Cathal Guiomard is Assistant Professor in Aviation Management in the DCU Business School

The shock to the world’s air transport system from the virus is indescribable. Last January, some 20,000  commercial jet aircraft were in service, moving passengers and cargo to and fro around the world. Traffic was expanding, and as aviation extended more strongly into countries like China and India, passenger numbers were predicted to double to 8 billion per annum over the next 20 years. Today, the number of passenger aircraft in service is about 2000, a 90% collapse. Cargo has fared somewhat better, with an expanded role ferrying, amongst other things, medical supplies.

That air travel, in some form, will recover is not in doubt, since the only way to travel long-distance in a timely way is by air, but when, to what degree and how, are mysteries at this point.

The airline industry was already in poor financial shape even before the virus grounded the world’s air fleets and wiped out their income. With almost no traffic now, airport operators’ and air traffic control provider’s revenues have likewise dried up. Aircraft manufacturers are in severe crisis, and their smaller suppliers even more so. Aircraft leasing firms, many based in Ireland, are rapidly re-doing their financial calculations.

Companies whose costs partly need still to be paid, but whose income is gone for now, can continue to exist only if they have large cash reserves, large lines of credit, or receive assistance from some external source. Aviation, like other industries, has been closed by government decision and not, for instance, by a recession. So there is a better-than-normal justification for temporary government (i.e. taxpayer) compensation or assistance.

Yet  some companies – aircraft manufacturers and airlines – were already struggling because of poor management decisions rather than the virus, and these cases should be treated differently.

What might the current crisis – and perhaps the government response, in particular – mean for aviation in future? Sweeping forecasts that ‘nothing will ever be the same again’ are unconvincing, especially to those who recall similar pronouncements after the 2008 financial crash.

Airports are set for changes; health checks will have to be added to existing security checks. The CEO of Heathrow airport has already proposed this. Airlines are also preparing to undertake health checks themselves, provided the tests give prompt results.

We are also likely to see fewer airlines because of collapses as well as mergers and takeovers. Airlines are pressing for relaxation of 75 year old restrictions on airline ownership (in the EU, to be a ‘Community carrier’ at least 50% of the airline must be owned by EU shareholders). To survive in the medium-term, airlines like all companies need to be profitable, but consolidation should not go too far to avoid driving up ticket prices for passengers. It is already true in the US, following consolidation from 10 major airlines to just 4 today, that the airlines earn a lot more profit per passenger than EU airlines.

And how long before something like ‘normal’ service resumes? That could depend on how crowded an aircraft we are willing to use. How crowded an airport? Our trust in the health of the strangers standing beside us will have an impact on travel in the future.

An important question is whether the current crisis and the climate threat might interact in the future. Judging by public comment, many environmentalists consider the sudden and very large policy response to the coronavirus demonstrates that a large mobilisation in the face of the climate threat is equally possible. There is definitely something to that. But the billions of euros that will be spent on dealing with the virus will not be available for other purposes. And the stunning impact on the economy of the shutdown will have alerted us all to the unbearable cost of an economic ‘sudden stop’, whether motivated by health or climate. Few will be willing to do this again; climate adaptation must be somewhat more gradual, not an abrupt cessation. However,  ‘degrowth’ may not be necessary. Suitable environmental taxes do not strictly even have to raise any net revenue as long as they make more polluting activities dearer than less polluting activities. This is not the case today, as visiting a car showroom quickly demonstrates. A revelation of the virus has been the number of Irish holiday makers going on skiing holidays after Christmas. Some of this, and air travel in general, is due to underpricing of airline tickets, due to aviation not bearing ‘normal’ taxes (VAT and fuel) and not paying carbon taxes commensurate with the emission of damaging carbon and other gases. Imposing such taxes might easily mean less skiing and if it does so, that is just taking climate change seriously. In addition, the big jump in public debt arising from the health crisis will make governments look around for additional revenue. Carbon taxes may become more attractive as a revenue source, as well as for their environmental benefits. But the extent of changes to aviation will take time to reveal themselves.

Cathal Guiomard is Assistant Professor in Aviation Management in the DCU Business School and programme chair for the DCU Bachelor of Science in Aviation Management.

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