Transportation Planning Casebook/COVID-19 and International Aviation

Summary
The COVID-19 pandemic has had an unprecedented and debilitating impact on the international aviation industry. Since January 2020, government agencies around the world have imposed a variety of border controls and travel restrictions in an attempt to prevent the transmission of the virus to local populations. As a result of these measures, the international aviation industry has experienced a significant drop in patronage and revenue. The economic consequences of this loss in air patronage has had far reaching implications for both global and local economies. Government agencies have sought to alleviate these impacts through the provision of financial support in the form of grants, loans, stimulus packages, subsidies and equity stakes.

The international responses to the pandemic have ranged in conservatism, and include outright border closures (eg. Australia and New Zealand), proof of a negative COVID-19 test (eg. USA and UK), proof of COVID-19 recovery (eg. Madeira), and proof of a received COVID-19 vaccine (eg. Guatemala, Iceland and Belize). This complex array of travel policy responses has further led to extensive complications for the international aviation industry, as constantly changing rules and regulations make it challenging to operate international services efficiently and foster consumer confidence. Ultimately, the recovery of the international aviation industry is anticipated to be long and difficult as passenger volumes are not expected to return to pre-COVID-19 levels until at least 2024.

List of Actors
The list of actors relevant to this case study are detailed below in Table 1.

Timeline
The key events relevant to this case study are shown below in Figure 1 and Table 2.



Maps




Airlines
An extensive array of government aid and policy measures have been implemented around the world to support the aviation industry following disruption from the COVID-19 pandemic, however the majority of government financial support has targeted the saving of airlines. Many governments view airlines as an essential method of connectivity to support their economy and competitive landscape. Consequently, countries must ensure that their domestic airlines services survive the impacts of the pandemic, as the loss of these carriers may result in severe economic consequences in the long-term. Accordingly, many governments have arranged for a mixture of takeovers, bailouts and financial relief packages for airlines. For example, the Italian government took complete ownership of Italy’s carrier Alitalia through a $650 million investment in June 2020. The implications of this policy venture may be long-lasting, as it ties the Italian government to the cyclical and competitive aviation industry, which may drain taxpayer funds that may be better allocated to other industries once the aviation industry has recovered. The US has been less inclined to utilise a takeover approach in their rescuing of American airliners, instead offering a $50 billion bailout package to be distributed amongst most US airlines. However, the bailout approach largely prioritises key market players (eg. national operators) over smaller, independent operations. As a result, these policies may distort the competitive airline landscape which may ultimately lead to undesirable market oligopolies that could decrease value to the consumer.

Airports
In contrast to airlines, airports received comparatively less attention and financial support from government agencies despite their similar demands for government aid. Unlike airlines, airports have limited flexibility in their operating costs as they are subject to fixed maintenance and operating costs for their infrastructure. This rigidity in operating costs makes it particularly challenging to alter operational expenditures, which has the effect of increasing their vulnerability to dramatic shifts in revenue. For example, while the Australian government has provided a AU$1.2 billion aviation and tourism support package, it only provides relief to airports for domestic security screening costs, thereby expecting Australian airports to cover an expected cost of AU$172 million for international security screening measures. Similarly, European governments have provided over EUR$31.8 billion to airlines, while only offering EUR$840 million for airports. The US’s Coronavirus Aid, Relief, and Economic Security Act provides US$50 billion to the US’s aviation industry (US$25 billion in loans and US$25 billion in grants), however only $10 billion of that is allocated to airports. As a result of these policies, airports may be challenged to maintain sufficient liquidity to cover operating costs. This may be further exacerbated by additional costly policies that airports will have to enact as a result of the pandemic, such as additional hygiene measures (eg. hygiene officers, increased sanitation processes and provisions of hygiene supplies to consumers).

Concessionaries
Airport concessionaires experienced significant declines in patronage - in parallel with the wider airport passenger volumes - as a result of COVID-19. Unlike typical retail or dining spaces, the return of consumers to these establishments relies on successfully overcoming two significant barriers: reductions in consumer shopping confidence and reductions in air travel confidence. This dependence leads to an operational fragility. To combat this fragility, concessionaires around the world have called for a mixture of private and public policies to reduce monetary strains and risks of permanent closure. Most critically, concessionaires have requested immediate relief for rent fees and payments to airport owners to ensure short-term survival.

Many private airports and government agencies have discussed granting temporary waivers or amendments to existing minimum annual guarantees (MAG), which define the minimum rent amount payable for a concessionaire to operate in a leased space. While countries have differing approaches on how to utilise MAGs (eg. minimum expectation vs absolute expectation), there is a general consensus that existing MAGs are designed for periods of stability and growth rather than extreme patronage contractions. Thus, the existence of MAGs during the COVID-19 pandemic has made concessionaire rental agreements untenable. As a result, policy-makers have sought to reduce or eliminate MAG payments over the last year. For example, the public airport authority of Dubai has temporarily waived up to 100% of MAGs for concessionaires in Dubai International Airport and Al Maktoum International Airport. The US has taken a more tempered approach to MAG relief, offering a $2 billion grant program to be distributed to both domestic and international airports across the country. However, these interim policy measures are not sustainable solutions as it is challenging to predict when air travel will resume to pre-COVID-19 levels and governments cannot afford to cover concessionaire rent payments in perpetuity. Therefore, policy-makers need to consider permanent changes in MAG design, such as MAGs tied to foot traffic or the elimination of MAGs in favour of payments exclusively tied to sales.

Airport car parking and transport operators
Car parking and transport operator revenue has been a secondary casualty of COVID-19’s impact on international air travel, as both airport-owned parking and transport services as well as commercial ride-share, taxi, valet services and off-site parking services have experienced significant declines in revenue. However, the competitive landscape between airports and commercial transport operators has led to commercial and regulatory policy criticisms.

For example, off-site parking operators have argued that Melbourne Airport’s fee policies are inequitable, as the airport has made it free to park on-site while still requiring access and congestion fees for shuttle services (to off-site parking). Private parking service operators argue that this has the effect of unfairly constraining competition since these fees limit their ability to provide independent parking services in favour of the airport-owned parking facilities. The monopolistic pressure may result in the permanent closure of these independent businesses as they become unable to compete with airport parking prices, which may consequently lead to higher service prices for consumers. Therefore, regulators need to carefully evaluate the competitive relationship between airports and transportation services to ensure commercial fairness and sustainability.

Aircraft manufacturers
The devastating impact of the pandemic on the aviation manufacturing industry has never been seen before. In 2020, the global aircraft delivery will only total 723, evidencing a 54% reduction compared to 2019. Many airlines are on the brink of bankruptcy, and British Airways is trying to apply for government assistance, postpone new aircraft orders and reduce after-sales market spending. Predictably, the outlook for global aircraft delivery will be bleak in the next three to four years. The new normal will mean that airlines will spend less on new aircraft and after-sales markets, but it will also mean a rebalancing of the aviation fleet. The company should re-evaluate its product portfolio and the breadth of its operation capability. Therefore, how airlines choose to ground or retire their fleet is the key factor to balance overcapacity and order reduction. Suppliers should ensure that they are ready to support their airline customers at all times to ensure that the aircraft can quickly resume service in the event of a small demand return, which is critical to the recovery of the aviation industry. One example is Lufthansa's thorough restructuring of its fleet to reduce about 100 of its 760 aircraft and to give priority to the reduction of fuel inefficient four reactor aircraft.

 Passengers services 

The epidemic has a sustained psychological impact on passengers, which will promote passengers to pay more attention to the safety, privacy and efficiency of the flight process. Business aviation has high efficiency, convenience and strong privacy. In terms of epidemic prevention and control, it can more effectively avoid contact with too many people and reduce the risk of infection. This kind of passenger demand for travel safety and privacy will stimulate a certain number of new users to use business aviation. In addition, this kind of consumer group comes from the business and travel demand of high net worth people but also comes from the demand of enterprises and government charter flights. At present, many public air transport companies also focus on promoting the product form of charter transport, which is also in line with the customers' demand for safer transport services under the epidemic situation [34 ].

In the early days of Covid-19, the demand for charter flights in Asia was higher than that in other regions, and long-distance flights were more common than regional flights. Especially when Asian countries implemented strict travel restrictions and quarantine measures, many passengers chose to flee to relatively safe areas[35 ].The first batch of Australians will return to Australia by charter flight from London in October 2020. On the arrangement of rework for employees of foreign enterprises, the German overseas chamber of commerce requires that all employees should not take civil aviation flights on their own, but take charter flights to return to work overseas[36 ]. All these have improved the health and safety of passenger charter flights and minimized the possibility of epidemic transmission.

The International Aviation Association predicts that the global aviation industry can only recover to the level of 2019 in 2024. Therefore, in the case of regular flights constantly blocked, the value and attractiveness of business aircraft charter is constantly improving.One of the world's largest charter agents, Al global charter, said that in 2020, leisure travel consulting volume increases by 49%, reservation volume increases by 14%, and 20 new customers' reservation volume increases by 25%.

Cargo Policy
Although the global air travel demand and capacity have declined by more than 50% under the epidemic situation, the pandemic trend also highlights the urgent need for air transportation.

First, the pandemic will play a positive role in promoting the transition process of global e-commerce, which will benefit air cargo transport providers. The UK East Midland Airport (EMA) has made full use of the opportunity of rapid growth of e-commerce volume during the epidemic period, and the increasing e-commerce orders are mostly the scramble for medical devices or equipment by EU countries or the UK, which has changed the hub status of the airport and promoted the growth of cargo transportation volume by 20%. EMA has developed from a freight hub in the UK to a freight transit center in Europe [37 ].

While the operational efficiency of North American air cargo is damaged, it also releases more positive and more resilient signals. The first sign of recovery is a 5% increase in freight demand in November 2020. When HJAIA was hit the hardest, 90% of its airliners were grounded, and nearly 50% of its cargo could not be transported[38 ]. The rate of elastic recovery of the airport benefits from its advanced operation mechanism. Ground service providers and road transport companies provide services to the airport at the same time, establishing the first digital air cargo community in the Americas in 2019. This platform guides other airports in the United States and Canada on how to improve transaction efficiency and reduce the spread of the virus through goods when the epidemic breaks out. In addition, HJAIA's digital function also emphasizes the improvement of freight tracking technology to ensure the smooth flow and safe delivery of the highest value commodities in Global trade and track each batch of vaccines[39 ].

Prior to COVID-19
Prior to COVID-19, commercial air travel sustained continued growth between 2009 and 2019. This period of growth was driven by technological advancements (e.g. twin-engine aircraft), proliferation of low-cost carriers and increasing global tourism demand. In 2018, a record of 8.8 billion travellers passed through airports around the world, which marked a 6.4% increase to the previous year. This high demand for air travel translated to significant contributions to the global economy. For example, in 2019, the total estimated revenue of airports around the world was approximately US$178.2 billion, of which 59.9% comprised aeronautical services, 39.2% comprised non-aeronautical services, and 0.9% comprised non-operating revenue.

COVID-19
In 2020, the international aviation industry experienced a dramatic reduction in air travel demand as government agencies around the world rapidly enacted border closures and travel restrictions in response to COVID-19. These policies aimed to reduce the movement of populations as a means of reducing the spread of the virus. The escalation of COVID-19 responses had debilitating impacts on the aviation sector, which has led to devastating impacts on both local and global economies.

The decline in global air travel can be attributed to a multitude of events. Initially, the announcement of a novel virus in Wuhan, China resulted in a slight decline in departures during January and February 2020 as local travel bans were imposed to restrict travellers from entering or leaving Wuhan. By March, as the number of confirmed COVID-19 cases in China increased, further restrictions were put in place both domestically and internationally to limit the spread of the virus, including a total lockdown of Wuhan and international border closures to China-based travellers. These travel bans resulted in drastic reductions in traffic for China’s largest airlines, who announced capacity losses of 85% to 90%. However, it was the declaration of COVID-19 as a pandemic by the World Health Organisation (WHO) on March 11 that seemingly had the greatest influence on the aviation industry. Two days after the WHO’s announcement, the USA banned all incoming travel from the Schengen region of Europe, which was reciprocated by the EU on March 17, resulting in a significant decrease in international air travel. On March 18, Canada and the USA also agreed to close their borders to each other, further reducing the rates of international flights. By March 21, departures collapsed to less than 10,000 aircraft around the world, and by the end of April, approximately 98% of the world’s fleet of international aircraft had been grounded. Due to the sharp decline in commercial passenger demand, the majority of remaining operational carriers comprised cargo aircraft, which were used to deliver medical supplies to the regions most vulnerable to COVID-19’s impacts. Interestingly, the combination of at-home shopping (as citizens isolated) and the primacy of cargo aircraft resulted in an increase in cargo yields by about 30% from the preceding year. Ultimately, the reduction in global travel experienced in the first 10 months of 2020 resulted in a decrease of 900 million international travellers from the same time period in the previous year. This equates to a loss of US$935 billion in tourism and export revenues around the world.

The path to recovery
While many industries and countries around the world are still suffering from the impacts of COVID-19, the aviation sector has observed a very slow recovery since June 2020. In particular, airlines with greater domestic market share are seeing more rapid recoveries (eg. Air New Zealand and Air China) comparatively to competitors who are traditionally more dependent on international routes (eg. Emirates, Qatar Airways and AeroMéxico). For example, Australia has seen its number of domestic travellers increase from approximately 400,000 to 2.2 million per month between June 2020 and December 2020. The last two months of 2020 also saw some minor improvements in daily global traffic, which may be a response to vaccine approvals in the UK, USA, Canada and EU.

However, long-term recovery has stalled due to ongoing travel restrictions around the world, as governments fear additional waves of the virus and more infectious or deadly viral strains. Notably, the humanitarian crisis in India has sparked new concerns about the potential wide-scale impacts of COVID-19 and has led to new border closures to India-based travellers. Some airlines have resorted to increasing domestic routes (eg. AeroMéxico and Air China) or increasing cargo operations (eg. Indigo) to supplement lost revenue, while others have temporarily suspended all operations (eg. Copa) in an effort to reduce cash burn rates.

Unlike previous crises that have impacted the airline industry, such as the 9/11 terrorist attacks in 2001 or the SARS outbreak in 2003, the impacts of COVID-19 have extended beyond localised geographies over a sustained period of time. While some countries, such as South Africa and Egypt, have relaxed their border policies in order to reignite travel in their regions, the timeline for a restoration of peoples’ confidence in travelling is unknown. As a result, experts have been challenged to predict the long-term recovery of the international aviation industry, although it is anticipated that increased hygiene measures and greater government intervention will be key components in future operations. Overall, many believe that air travel has changed permanently, and that the international aviation industry must adapt to this new reality.

Discussion Questions

 * 1) Does the current aviation industry need to transform in the era of e-commerce to better cope with emergencies such as epidemic situations?
 * 2) How can the aviation service industry help people overcome the fear of the epidemic in order to achieve better profitability?
 * 3) Do you think the government's aid programs (such as subsidies, tax cuts, loans and even equity distribution) can fundamentally solve the bankruptcy crisis of some airlines? If not, what measures need to be taken to deal with it?
 * 4) Can aviation be completely replaced by other modes of transportation during the epidemic period to achieve the purpose of transportation?

Further Reading Materials

 * Impact assessment of the COVID-19 outbreak on international tourism
 * COVID-19 and the aviation industry: Impact and policy responses