Opinion article

How airlines will survive the COVID-19 crisis

The Airport Economist, University of New South Wales Business School J.W.Nevile Fellow in Economics, Tim Harcourt, writes that what happens in the coming months will determine whether Australia's airlines make it through the corona virus crisis. "This is all about short term survival and cash flow. Provided the airlines can get through this temporary grounding they will survive."

The closing of borders and cancellation of flights to limit the spread of corona virus has sent shock waves through the aviation industry, particularly here in Australia. It is said that no one has made money out of aviation since the Wright Brothers so this latest corona shock comes on top of already tough times in the skies.

The airline industry is not like any other business. This is particularly true in Australia, a vast island continent that suffers from ‘the tyranny of distance’ in the immortal words of our most famous economic historian Geoffrey Blainey. For Australia, the airline industry is an essential service, connecting the outback to the towns and cities and linking Australia with the world. Because of our vast distances and small population it requires a lot of capital and infrastructure.

That means there is a large public good to running an airline in Australia, evident in the hundred-year history of Qantas from 1920 to 2020. Qantas was started in Longreach in outback Queensland, and spent its early days running the mail across Queensland and the Northern Territory to help regional communities (hence its name: Queensland and Northern Territory Air Service or Q.A.N.T.A.S). We saw the public good element of Qantas again during the bushfires, as we do now during the current corona virus emergency, in which the airline has organised flights to carry Australians stuck in Wuhan and Tokyo. 

The national carrier is essential for a nation like Australia but we also need Virgin for consumer choice and competitive innovation.

Corona virus has hit the airlines hard. Following in the footsteps of Qantas, Virgin Australia is now grounding all international flights for two and a half months and halving its domestic flights. So what does this mean for the longevity of the Australian aviation industry?

This is all about short term survival and cash flow. Provided the airlines can get through this temporary grounding they will survive, as Qantas has a healthy balance sheet and Virgin has wealthy parents with deep pockets: Etihad Airways, Singapore Airlines and HNA.

To help aviation, the Federal Government has announced a $715 million aviation relief package, which will provide temporary relief by waiving regulation fees and charges during grounding.

This is more efficient than a cash splash – it is more like a payroll tax reduction, designed to get the airlines through the next few months of border closures.

However, Australia is not alone. The corona virus is truly the downside of globalisation and airlines around the world are on the front line. Analysts predict that while traditional airlines will survive, some of the new budget airlines might be absorbed or restructured.

What impact will this have on tourism? International tourism will be worst affected now that flights are grounded, although every country in the world will feel the same impact.

For domestic tourism, this shock comes at a bad time particularly in the regional areas hit hard by the recent bushfires. That said, now that international travel is temporarily suspended, the local tourism industry may be able to claim that now is the time to explore Australia’s wide open spaces where the lack of crowds make it easy to maintain social distance (although we should still be cautious and follow the appropriate official advice).

But what will happen in the recovery period for the aviation industry? We still don’t know how long the aviation grounding will last – some say three to six months or maybe even for the rest of the year – but we do know that when economic recovery comes the airlines will bounce back quickly. Look at Cathay Pacific: the Hong Kong based airline took a huge hit last year due to protests in Hong Kong and now it has put on extra capacity to deal with coronavirus. 

Qantas has prepared for a long haul future with initiatives such as Project Sunrise, so it has plenty of capacity waiting in the wings. This aviation package is necessary to help Qantas, Virgin and Rex get through the short run impact of the corona virus; at times like this it is vital to remember the public good that airlines bring, particularly in the case of Qantas and Australia.

For 100 years Qantas has helped Australians overcome the ‘tyranny of distance’. Now that Qantas faces the ‘tyranny of social distance’ in dealing with corona virus, we need to help it and the rest of the industry to get through these troubled times in the global economy.

About the authors

Tim Harcourt

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Tim Harcourt is the J.W. Nevile Fellow at the University of New South Wales (UNSW) Business School Sydney and host of The Airport Economist TV series and The Airport Economist Podcast. He is the author of several books on the international economy including the best seller, The Airport Economist.