Business

Getting back on their wings: SriLankan v international airlines

A few of the world’s prominent airlines have gone bankrupt with a few more expected to fold over the coming months.

By Madhusha Thavapalakumar

The extreme restrictions on air travels and prolonged closures of airports for international tourists brought about by Covid-19 have made 2020 the most challenging year for the global aviation industry in its history. The gravity of this crisis could be understood by the fact that a few of the world’s prominent airlines have gone bankrupt with a few more expected to fold over the coming months.

The world’s second oldest airline and the second largest airline in Latin America, Avianca Holdings’ Colombia carrier filed for bankruptcy two weeks ago. Early March, the UK regional airline Flybe entered administration, a practise similar to declaring bankruptcy, and in mid-April Virgin Australia entered voluntary administration.

Even though now the countries are increasingly easing down their restrictions and removing lockdowns in a bid to facilitate normalising their citizens’ lives and businesses, and also to allow breathing space for their economies, it is very much unlikely that the aviation industry would return to normal anytime soon.

However, since it is better to engage in some flying than being completely grounded, a number of international airlines are preparing to get back in business in the coming weeks. Nevertheless, this time “getting back in business” could not be done merely by disinfecting aircraft cabins or following any other accustomed routine, as airlines are in a critical position to make themselves viable despite global volatility or risk going bankrupt.

Amidst pay cuts and laying off employees, airlines have had to come up with efficient financial plans and operation models to ensure sustainability in the industry. In order to draw comparisons with our very own SriLankan Airlines’ recovery strategy, The Sunday Morning Business decided to take a look at a number of international airlines that have already begun flying or are preparing to operate in the coming weeks and their plans on how they are going to financially survive this global battle.

American Airlines

American Airlines is one of the prominent and largest airlines in the world. In terms of the fleet size and revenue, the airline is the biggest airline in the world. It is also the second largest airline in the world in terms of destinations served, in which United Airlines is on the lead.

In mid-March, the airline said it will implement a phased suspension of nearly all of its long-haul international flights due to reduced demand for air travel and restriction placed on country-to-country travel to mitigate Covid-19. This was a reduction of nearly 75% of its international capacity. The airline’s domestic capacity too was reduced significantly in the following months.

As a result of the suspension, American Airlines had about 450 flights parked by March and about 13,500 employees offered voluntary unpaid leaves, and the company offered early retirement for employees with 15 years of experience. It is learnt that American Airlines took out $ 1 billion line of credit from Citibank to manage its financial issues for the next few months.

American Airlines launched flights to Madrid, making it the first US carrier to return to Spain in months.

For the first quarter ended on 31 March 2020, American Airlines posted worse-than-expected losses in six years. The loss during this period was $ 2.2 billion and the airline expects a $ 70 million loss per day in the second quarter.

Nevertheless, with eased down restrictions, the airline started its operations last Thursday. American Airlines launched flights to Madrid, making it the first US carrier to return to Spain in months. Furthermore, the airline is hoping to resume flights to London from 4 June onwards, while flights from Chicago to Dublin and Athens are set to commence on 5 June, operating five times per week. Flights to Munich and Paris will resume two days later.

Despite resuming flights to their usual destinations, as a measure towards saving itself from bankruptcy, the airline has added a new route to its 2021 schedule. The new route is from Philadelphia to Reykjavik and the airline has assigned a narrow body aircraft in this route. In another measure, American Airlines has also decided to reduce its fleet by about 100 aircraft, which is expected to reduce costs related to parts and tooling, according to its Senior Vice President of Strategy Vasu Raja.

 

United Airlines

United Airlines is known to have the world’s most comprehensive route network. United operates 791 mainline aircraft and the airline flies to 78 domestic destinations and 111 international destinations in 74 countries including the US, Asia, Africa, and Europe.

By 20 March, United Airlines shut down 95% of its international schedule due to Covid-19. From 1 April onwards, they suspended flights to and from Canada to America and from America following both the countries’ decision to close the border between them for non-essential travel. The final westbound departure of United Airlines was on 25 March, while the final flight from Cape Town departed on 28 March. Prior to all these suspensions, United suspended routes to Japan and China at the height of the virus outbreak in China.

For the first quarter of 2020, the airline’s net loss was around $ 1.7 billion and the company noted that the impact would be higher in the second quarter due to an almost standstill of flight operations. The revenue for the quarter was below analysts’ estimate of $ 8.2 billion. To deal with the crisis, its CEO and President decided to forego 100% of their basic salaries while other officers took a pay reduction of 50%.

Nevertheless, following a slow and gradual easing down of restrictions and green signals for essential travels, United Airlines is planning to resume four flights to Beijing, Chengdu, and Shanghai from June onwards. Furthermore, it plans to resume three weekly flights to Japan. However, it is learnt that United is further reducing many of its European flights this summer and focusing more on the Asian region.

United Airlines suspended its long-running service between Singapore and Hong Kong in 2017 as the airline decided to fly Singapore to the US Westcoast instead. However, the carrier has once again requested to fly in those routes with immediate effect. The service would launch as cargo only initially, but according to the request made by the airline, the carrier also intends to fly passengers.

The airline also plans to eliminate at least 30% of its management and administrative positions by 1 October, which will amount to more than 3,400 of the company’s 11,500 management. Furthermore, the airline obtained $ 5 billion Federal Funds to avoid layoffs through to 30 September.

However, United Airlines was criticised by its passengers for not leaving the centre aisle seats empty to which the airline replied that it cannot guarantee that passengers will be seated next to an unoccupied seat, but added that given the low demand for travel, it is likely that customers would have space between seats.

Lufthansa 

Lufthansa is in discussions with the German Government,  led my Angela Merkel, over a bailout which could cost about € 9 billion

Deutsche Lufthansa AG is the flag carrier and the largest airline in German. With all its subsidiaries combined, it is the second largest airline in Europe in terms of the number of passengers carried. The group has just over 750 planes while Lufthansa has about 300 planes.

Soon after the Covid-19 outbreak in Europe, on 2 March, Lufthansa announced that they are cancelling about 7,100 flights for about a month due to lower demand and the suspension was later continued until 1 June later. In early April, Lufthansa group closed its Germanwings budget airline as part of a wider cutback. Lufthansa-owned Brussels Airlines reduced its workforce by 1,000 employees early this month.

On a preliminary basis, the group’s revenue fell by 18% to € 6. 4 billion in the first quarter ended on 31 March 2020. In March alone, revenue declined by about € 1.4 billion or 47%. At that point, the airline stated that they will run out of cash in the coming weeks.

As a move towards mitigating the financial impact of the pandemic on their business, Lufthansa had already announced plans to retire about 29 planes. Before the pandemic, Lufthansa had about 200 aircraft in order and due to the unexpected impact on their business, Lufthansa is now negotiating with aircraft manufacturers to postpone aircraft deliveries as the airline is not in a position to expand their fleet size in the near future.

Lufthansa expects to recover from the impact by 2023. The group is in discussions with the German Government,  led my Angela Merkel, over a bailout which could cost about € 9 billion and the Government has reportedly requested a 25% stake in the airline.

Furthermore, Lufthansa is planning on reactivating about 80 aircraft from early June onwards to 106 destinations, according to Harry Hohmeister, a member of the Executive Board of the German Lufthansa. The number of flights are expected to be increased gradually following the initial weeks.

Despite the restriction on passenger air travel, air cargo was widely in operation during this period. In mid-April, Lufthansa took out seats from several of its aircraft to create space to carry extra cargo. This move is part of their efforts to meet the capacity crunch through expansion of cargo services. 51 weekly cargo flights were operating from Germany and Austria to Asia. After Easter, 35 weekly flights were added exclusively for cargo transport.

Delta Air Lines

Delta is another leading american carrier. As of March 2020, Delta Air Lines operated a fleet of 913 aircraft manufactured by Airbus and Boeing. Delta flies to over 300 destinations in 60 countries.

Delta Air Lines last week said it has suspended service at 10 US airports from 13 May onwards in a bid to minimise their employees’ exposure to the virus, until at least September 2020. Furthermore, Delta has downgraded 10 of its primary airports as secondary airports. In March, the airline initially suspended flights from the US to China due to the coronavirus outbreak until 30 April, but it was later expanded to 31 May. By mid-March, the airline’s capacity was already reduced by 15%, which in the subsequent weeks reduced further to an almost standstill following the virus’ spread in Europe. The international capacity of the airline was down by over 90% in the past few weeks.

As a result, Delta lost $ 534 million in the first quarter of this year and was the first quarterly loss in five years. Delta is the first airline to report the financial impact of the Covid-19. Revenue in the quarter fell $ 1.9 billion compared to a year ago.

However, now with a few relaxations in travel restrictions, Delta is setting up to fly from May onwards to selected destinations, allowing both passenger and cargo movements. Resuming routes are North and South America while most of the overseas routes to Asia, Australia, Europe, and Africa are set to remain suspended for sometime. Delta will also resume four daily flights to Canada and will also resume two routes to the Carribean and five routes out of Atlanta.

To attract more passengers to use Delta Air Lines, the carrier announced travel waiver policies to make it even easier for customers to cancel, change, or rebook travel for upto two years, giving extra comfortability for its customers. Usually, tickets expire one year after purchase, but Delta has given more leeway in that case.

Due to the newborn market opportunity driven by the increased cargo movements, Delta began daily passenger freight flights from 13 May onwards from South Korea to Los Angeles and Atlanta three times and four times per week, respectively. Delta is the first airline to obtain the federal clearance to carry cargo in its overhead bins as it repurposes passenger planes.

Delta received $ 5.4 billion in government rescue funds via the Coronavirus Aid, Relief, and Economic Security Act. As part of the deal, the American Government will acquire about 10% of Delta stocks at $ 24.39 per share over five years. The fund comes from the Treasury’s payroll support programme and includes an unsecured 10-year low-interest loan of $ 1.6 billion.

What is SriLankan Airlines doing?

A few weeks ago, the airline managed to launch dedicated cargo services to a host of destinations to facilitate Sri Lanka’s exports.

SriLankan Airlines is the national carrier of the country and is the largest airline in Sri Lanka in terms of the number of aircraft and destinations. It has an all-airbus fleet of 25 aircraft and flies to 96 destinations in 46 countries.

According to the International Air Transport Association (IATA), Sri Lanka is likely to lose $ 715 million in revenue this year due to the impact of Covid-19. At the beginning of April, SriLankan announced mandatory salary reductions of staff starting from 2.5% to 25% for a period of three months, effectively dismissing all salary increments for the year 2020. It has also sent 400 contract staff on three months’ no-pay leave till July.

SriLankan Airlines Chairman Ashok Pathirage expects a revenue drop of $ 400 million in the coming year. Before the pandemic, SriLankan predicted the loss for the ongoing financial year to be $ 120 million.

On 6 March, the airline temporarily suspended its flights to China to ensure no Covid-19 carriers or patients enter into the country. However, on 18 March, the Government decided to close the country’s international airport, Bandaranaike International Airport (BIA), for both departing and arriving passengers. A few weeks later, departing passengers were allowed to go out of the country but passenger arrival still remains closed.

Nevertheless, SriLankan is actively bringing back Sri Lankan immigrants from a number of countries including India, Singapore, Australia, and the UK to which the airline charges higher than the usual rates. It also operated rescue flights for China, Australia, and the UK, helping their respective immigrants to come back home. A few weeks ago, the airline managed to launch dedicated cargo services to a host of destinations to facilitate Sri Lanka’s exports. It is learnt that the airline is receiving cargo inquiries now, which would strengthen the airline financially for a certain extent.

The Sunday Morning Business also learnt that several lease payments of SriLankan have been deferred following the requests made by the airline, while new credit lines were also opened. When we contacted SriLankan Airlines for additional information on this matter, they refused to comment at the moment.

SriLankan is accepting bookings for outbound flights to London, Hong Kong, and Tokyo in May, while most of the airlines in the region are yet to fly to these destinations. Furthermore, the airline also recently said that it will operate 27 special cargo flights from 18 May onwards, from Colombo to Europe, Middle Eastern countries, and India.

With the pandemic, it is still unknown whether SriLankan would still go for destination expansion plans it had in mind for 2020. It is also unknown whether the airline will implement the strategic plan that was compiled under the previous Government. When we questioned Pathirage early this year on the implementation, he stated that it was premature to decide on it; however, he assured that the plan will not be disregarded just because it was done under the previous Government.

How does the future look for the aviation industry?

The International Civil Aviation Organisation (ICAO) forecasts a 48% decline in revenue for both international and domestic airlines in 2020

Except for the airlines that went into bankruptcy, airlines around the world are gearing up to fly in the coming months, and as a move to mitigate their financial impact, most of them have dropped a considerable amount of their usual routes in order to reduce the losses caused by empty or half-filled flights.

Most of the airlines have entered into loan agreements and aid with their respective governments, and the governments in turn have acquired the airlines’ stocks. In the meantime, several airlines reduced their fleet sizes and found new routes to add into their business while more have opted for cargo business considering the dramatic increase in cargo movements amidst the peak of the pandemic.

Nevertheless, the International Civil Aviation Organisation (ICAO) forecasts a 48% decline in revenue for both international and domestic airlines in 2020 due to the impact of the virus on their businesses. The ICAO also predicted that the airline passenger volume will probably not regain its peak for at least three to five years depending on the distance segment, while the pricing recovery will lag volume recovery by at least a year. However, it stated that business travel will recover more quickly than leisure travel but at a permanently lower level.