6 August 2020
The aviation industry has been particularly hard hit by Covid-19. As air travel resumes, Partner Peter Coles outlines a number of ways in which governments can help the industry in the longer-term.
Aviation is a key driver of connectivity and economic activity
Air transport supports 65.5 million jobs and USD2.7 trillion in global economic activity. The global network used to carry more than 4 billion passengers and 62 million tonnes of freight each year. As Alexandre de Juniac, the Director General and CEO of the International Air Transport Association (IATA) once said: “Airlines empower people’s lives and turbo-charge the global economy". The airline industry has also continued to save lives. The emergency transportation by air of expertise, medicines and medical equipment (ventilators) and PPE and other humanitarian aid being a feature of the Covid 19 crisis.
As we know, the coronavirus has had a devastating impact on the aviation industry: airlines, airports, airport service providers, manufacturers, leasing companies, the travel and tourism sector and many others are impacted. It has been said that the crisis will have an impact for years, and the market will take years, perhaps a decade, to return to pre-crisis levels. In April, IATA estimated that airline passenger revenues will decrease by USD314 billion in 2020 as a result of the Coronavirus. That’s a decline of 55% compared to 2019.
The airline industry often experiences a roller coaster ride. It is particularly susceptible to world events.
IATA estimated in February this year that airlines on average entered the crisis with only two months of cash, which raises questions about certain business models, aircraft fleet procurement plans, alliances and management practices. There was an immediate flurry of activity to seek lease rental holidays, reschedule aircraft orders and seek protection of airport slots. Drastic staff cuts and the closure of unprofitable subsidiaries have followed. A number of airlines have fallen into administration or insolvency, others are seeking to restructure and once again the industry has sought bail outs from government.
How can governments help?
There are four things that I think governments can do to help develop the industry in the longer term.
First, consider reforming bankruptcy rules to ensure that unsustainable business models and operations aren't endlessly propped up. Second, impose mandatory solvency requirements / or enhance existing solvency requirements. In many countries, airlines are obliged by statute or as a condition of holding an AOC to be able to meet their financial obligations over the next 12 months, but more is now needed to meet unforeseen and long lasting shocks. Third, facilitate the consolidation of airlines, with restrictions on competition law barriers. Far more critical though is, four, for governments to allow Open Skies.
When the US government first began promoting Open Skies agreements, the concept met considerable opposition from airlines. Many carriers were accustomed to restricted-entry markets, had made major investments in building lucrative international markets, and feared inroads into their home markets, where they often enjoyed dominance. Governments were quite used to trading for a balance of benefits, leading often to tit-for-tat—you want something for your carriers, we get something for ours. Consumers were often left behind. Open Skies not only relaxed pricing and capacity controls, but also made it possible to serve many more points behind the previously restricted number of international gateways. Another by product was to enable much more extensive sixth freedom operations internationally.
Outside the United States and Europe, very few countries practice open skies. There are no justifiable reasons for this. With genuine market access and freedom of navigation, there will be less need for national carriers, freeing up badly needed cash for governments to invest elsewhere.
For further information, please contact
Peter Coles, Partner, Clyde & Co
peter.coles@clydeco.com
