Air travel recovery in North America will be years in the making, insiders say

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TORONTO — Air travel has plunged 90 per cent, the vast majority of passenger airplanes are parked on tarmacs and runways around the world, and the few that are flying are about three-quarters empty.

But the news isn’t all dire, according to North American industry insiders.

The sector was on good financial footing heading into the COVID-19 disaster, there is an uptick in cargo demand that is buoying bottom lines, and there is general consensus that the Canadian government will join the U.S. and other jurisdictions in providing short-term bailouts.

And at least one executive at Air Canada thinks air travel demand could be well on the road to recovery by the end of the year.

"I think by Christmas you will see a significant amount of flying again," said Tim Strauss, vice-president of cargo at Air Canada. "I do think in the fourth quarter, we'll be flying to most places around the world and certainly domestically."

Strauss was among airline insiders exploring the future of the industry during a livestream hosted by the Canadian Club Toronto on Thursday.

He said that Air Canada anticipates it “won’t be anywhere near” 70 to 100 per cent of its previous capacity by the end of the year. Passengers will see fewer flight options and will have to contend with more connections to get to where they’re going, he said.

Veteran industry analyst Helane Becker says the North American airline industry was riding an air travel boom more than a decade in the making. That bodes well for a long-term recovery, but the short term will be painful.

She anticipates that North America’s airline industry will be about 30 per cent smaller at the end of the year and that means a sacrifice of about 200,000 jobs.

Recovery is going to be a long, slow ascent, says Becker, who works for investment bank Cowen. It took almost four years after 9/11 for air traffic to come back and this disruption is likely to be even more long-lasting.

Cowen predicts it will take three to five years for North American air travel to be restored to pre-pandemic levels and that it will take five to seven years for international passenger numbers to rebound.

Visits to family and friends are expected to be the foundation for initial demand, says Becker. Leisure demand will depend on how fast jobs are recovered and when borders, tourist destinations and attractions reopen. Business travel is expected to be even slower to rebound.

Getting passengers back into seats will depend on how successful the airlines are in convincing customers that it’s safe to fly, says Strauss.

“The whole industry will be working in tandem with one another really to make sure that it’s good no matter what airplane you are on, anywhere in the world. That’s the central issue for us right now.”

There are a lot of unknowns that make forecasting capacity really difficult, says Mark Williams, president of Toronto-based Sunwing.

“We don’t know how quickly this virus will go away. We don’t know how quickly people will come back to flying,” he said.

Sunwing, which jetted 4 million passengers to warm climates last year, is now fully grounded. While bookings for next winter are actually ahead of last year, Williams doesn’t believe that will last. He says the government has to inject some liquidity into the industry that faces many months of vastly reduced revenue.

“This is not going to go quickly back to normal. We are not going to snap our fingers in November and be operating at 100 per cent of the capacity we were operating at before.”

Williams says laying off his 3,000 employees was “a really difficult thing to do, but you have to protect the future. We have to be thinking about where we go when we come out of this and model scenario after scenario in a really uncertain time.”

American Airlines cut its capacity by 80 per cent in April and May and is expecting a reduction in June of about 70 per cent, says Jim Butler, senior vice-president of airport operations and cargo at American Airlines. But it’s really a guessing game.

“I cannot ever remember a time when we had no idea what really should be the right capacity eight weeks from now, much less when we’re going to get back to the size we were before.”

The airline’s challenge is offset by U.S. government support and the fact that 39,000 employees took voluntary leaves ranging from a month to a year.

He echoed that it’s critical that the industry work together to deliver the message to passengers that air travel is safe. He says COVID-19 has forced a completely new cleaning regimen on planes and in airports.

Many airlines, including Air Canada and WestJet, are requiring passengers to wear masks and blocking off seats to allow for physical distancing. Those are likely to be measures in place for the foreseeable future as some semblance of normalcy returns while the novel coronavirus still poses a threat.

“No. 1, you have to make sure that a customer is safe and No. 2, you have to make sure that they feel safe. And both of those are equally important,” said Butler.

While they wait for passengers to take to the skies again, Becker does not anticipate any North American airline will go bankrupt, despite the unprecedented hit they are taking.

That’s partly because the highly volatile sector went into the crisis with years of profitability, capitalization and investment behind it. The years of restructuring and consolidation that resulted from the recession in 2008 and 2009, combined with historically low interest rates and the shedding of high-cost labour that is to come, are all huge factors in favour of the major airlines, she said.

Between Delta, United and American alone, 23,000 pilots are set to retire over the next decade. So those airlines will be replacing pilots earning US$335 an hour with mid-career pilots earning US$260 an hour.

Combined with voluntary leave programs and early retirement packages, the major airlines don’t have to cut labour costs, says Becker.

Many airlines, including Air Canada, have been investing in a new, fuel-efficient fleet, and that will pay off in recovery, too. Overall, the industry was the best capitalized it has been in her 30 years studying the balance sheets.

“You don’t have a lot of ability to cut costs at this juncture, so bankruptcy is not an option. We need to get through this,” she said.

“Our view is that the industry will get through this. It’s very resilient. It’s had to be. We’ve come into it in a significantly better place.”