A few words of orientation first: I am fully aware of the context and the self-awareness from which I have arrived at the following realisation. For years I too have been part of the growth system mentioned in this text. Consequently, I must also accept criticism for having benefited from this “system”. I completely stand by that. When growth tempts you, it is difficult to look beyond what lies directly in front of you. But I would like to at least have the chance to exercise constructive self-criticism – from my current, most certainly privileged, position. After all, I am also starting to observe a change of heart among many current and former colleagues. And this change of heart, I believe, comes at the right time.
An unprecedented rescue parachute – at high speed, and just like that?
Around the world, airlines have received more than US$85 billion in rescue funds. Otherwise, Covid-19 would have wiped them out. This way, jobs at the directly impacted airlines as well as within the entire ecosystem around airports will be saved. Connections to places and markets will remain secured. In our closely interlinked world, flight connections that provide these access points for people and goods are essential, especially in times of crisis.
On the other hand, $85 billion is by no means a petty little matter. Such significant sums are certainly linked to far-reaching conditions – aren’t they? Not really. The conditions attached to the rescue packages have been minimal at both national and international level. Depending on how you look at it, this is either a fortunate or a rather strange development. Remember how banks and financial institutions in many countries were given tough requirements in connection to the money they had received during the financial crisis?
Is this correct? Shouldn’t states and regulators take a different approach and a harder line with aviation? More precisely, shouldn’t they demand a greater resistance to future crises, in other words, a more sustainable handling of the national wealth they have accumulated?
One thing is certain: the next assertion of systemic relevance in an exceptional situation will, as much as we would prefer it not to, come back to haunt us much sooner than expected. The time to act and to use the crisis as an opportunity for change is now. This way, the lead time until the next event might be long enough so that the begging bowl held out for state aid will not be quite as big. A big pro-active liberating blow, one might say. But how to go about it?
Higher equity ratios, improved risk coverage, new principles for liquidity management: in Switzerland, the ‘Basel III’ framework, the BIS regulations on banking regulation, has become much more restrictive in the wake of the financial crisis. At the time, there was a relatively broad consensus that people – and “people” in these cases always means “all of us” – did not want to bail out the banks again with billions of dollars in government money. In most international financial centres similar systematic measures could be observed. I would also like to point out that a number of systemically important banks subjected themselves to even more far-reaching security requirements. And these have taken effect, not least in the current crisis.
The various payments that Greece, as a nation state, received from the EU from 2010 onwards to save the country from bankruptcy were also linked to the implementation of numerous reforms and budget consolidation measures. In many other places, the EU Commission, the IMF and the ECB also imposed tough conditions for financial aid.
However, in the case of airlines – which in the past have already been dependent on government support on more than one occasion – the terms imposed are minimal. Although, depending on who you talk to, opinions do differ: for the Swiss confederation, for example, it is chiefly important that the funds that are spoken do not go to Germany. “Strict” is different. Airline-related businesses are also supposed to make sure that any of the funds received will not flow abroad. In other countries, the conditions for bailout money are even less stringent. I fully sympathise with taxpayers who are surprised about this.
A little bit of the misery is self-inflicted
In recent years, many airlines have invested massively in their growth, buying (not leasing) aircraft, expanding connections – and launching price wars not just in the short-haul segment. In doing so, we have become highly dependent on a very volatile mass segment, and, as a matter of fact, in the past ten years even used this segment as our growth-engine. The result: the “golden decade” of aviation. This, however, had one side effect: we all exposed ourselves, fully unprotected, to the risk of straining the supply-and-demand principle to such an extent that the enormous growth in demand was driven by an oversupply of capacity. This has further reduced the already low margins. Provisions were made only very cautiously, if at all. In recent years, US airlines have spent more than 90 per cent of their profits to buy back shares – and thus made short-term investors happy. All of us could work out that this fixation on growth and low margins make the industry dependent on precisely this highly volatile demand. Unlike any other sector, the airline business is thus highly sensitive to economic and social developments. And it is so on a global level.
Of course, it cannot be denied that in times of crisis even large cash reserves will not last for a long period of time. The airline business is capital-intensive. And it is of course a little unfair to make these observations during a global pandemic. After all, Lufthansa chief executive, Carsten Spohr, is right when he recently stated in Neue Zürcher Zeitung: “It is almost impossible to prepare for a crisis of this dimension, in which 99% of the business disappears over months. The necessary buffer would be so immense that no globally operating airline could cope with it”.
A little restraint and common goals would be win-win
Nevertheless, now is the time to stop turning a blind eye: airlines must better secure their business. They need to ensure stability as best they can and draw up future-oriented, sustainable financial plans. Solid risk management and business continuity strategies are the tools of the trade – now more than ever. Lufthansa and United Airlines are already more consistently leasing aircraft rather than buying them and have started adapting their route networks.
The same applies to business planning and cash, health and safety and climate and security standards. Here too, I have long been convinced that the industry would be better off “regulating” itself. Individual airlines are making a major effort to contribute to climate protection. Swiss, for example, is investing in a particularly fuel-efficient fleet. Singapore Airlines has modified the Trent 900 engines of its A380 aircraft to reduce CO2 emissions. KLM saves weight. Etihad is experimenting with flights without the use of single-use plastic. But demands are high, and the road is long.
The challenge, whether it is about environmental, safety or accounting issues, is as follows: if the industry does not develop uniform standards – or at least sets uniform goals –, then others will do it for them. And they certainly will not do it in a coordinated way. This should be clear to the chief executive as well as to the chief financial officer and the head of corporate social responsibility.
If different rules of the game apply in every country, they become incredibly demanding and complex to comply with. And it potentially distorts competition even more. States that support airlines are the only ones that could introduce particularly loose regulations. I fail to understand why there is no greater momentum behind industry-wide efforts to regulate this once and for all, and on a large scale. That would certainly be beneficial for everyone.
Together into the future
Corona shows us again that it is not just “the eleventh hour” – time is literally running out. The industry, preferably our entire ecosystem, must react now. That self-regulation can work in close cooperation with the authorities is shown by a recent example of the European Aircraft Associations and the European Aviation Safety Agency. Together with the European Centre for Disease Prevention and Control, they have compiled guidelines for airports, airlines, and operators to ensure that passengers can travel safely even in times of corona. Which will make life easier for all of us.
We can no longer close our eyes to the fact that the world with and after Corona is a different one. Let us face this challenge together and reposition the industry in a new and better way. We are better equipped than others to do this.
Aviation analyst Peter Baumgartner is the chairman of the board of directors and Metrocore Aviation Group.