THE IMPACT OF COVID-19 ON THE AIRLINE INDUSTRY

8 min readDec 23, 2020

INTRODUCTION:

The term ‘Aviation’ defines the mechanical air Transportation which is being carried out by using aircraft. The aviation industry includes all types of air travel activities such as airline industry, aircraft manufacturing, military aviation etc.

An airline can be identified as an organization which provides scheduled services to carry passengers or goods by air. The airline industry, which is considered as a sub-sector of the aviation industry is broadly classified as a part of travel industry. The airline companies provide air transport services both for passengers and for freight and are most frequently delivered by jets, while helicopters are still used by some airlines.

Due to the globalization the significance of the aviation industry has been increasing which helps in connecting different countries. The aviation industry has also been a crucial contributor to global economic growth by helping in improving growth of tourism industry and the global trade.

Two major types of aviation are — civil and military. Civil aviation encompasses all private and commercial air transport, irrespective of whether flights include passengers, freight or a mixture of all. Military aviation refers to the use of aircraft within military contexts. This type of air transport is usually designed to allow aerial combat or undertake surveillance operations.

Airlines are mainly classified as three types –

· International airlines fly on different overseas destinations.

· National Airlines are largely linked to a single nation, mostly with all of its major hubs in a particular country and are typically more focused on promoting domestic air travel.

· Regional airlines are smaller than national and international airlines, which focus on those places that do not get coverage by national and international airlines.

The manufacturing of aircraft is a vital part of aviation industry and it is very challenging. There are mainly two companies who are the largest manufacturer of aircraft in the world.

· European aircraft manufacturer ‘Airbus’ is the largest aircraft manufacturing company which produces aircraft for both the civilian and military aviation markets. The revenue earned by this company in 2019 is around $ 78.90 billion.

· US based company ‘Boeing’ is the second largest aircraft manufacturer in the world. The revenue earned by this company in 2019 is around $ 76.60 billion.

Other aircraft manufacturer companies are Lockheed Martin, United Technologies, Northrop Grumman, GE Aviation etc.

Although there are a variety of ways to identify the world’s biggest airline carriers, but one of the most commonly used criteria is revenue generated by the airline companies.

BUSINESS MODELS FOR AIRLINES

The aviation industry is highly diverse and every airline has its own method of doing business.

The airline industry mainly follows the below mentioned four business models:

· The ‘Full-Service’ business model ensures no extra expense for passengers luggage allowance and all in-flight meals. Most full-service airlines have a customer loyalty programme that rewards frequent flyers.

· The ‘Low-Cost’ model is based on the concept of reducing operating expenses and selling of airline ticket on the attraction of cheaper prices. Passengers will have to pay extra amount to get additional benefits.

· A ‘Charter’ Carrier will run services to high-demand destinations and travel agencies will want to book as many passengers as possible on such flights.

· ‘Cargo/Fright’ carriers are mostly or entirely engaged in the transport of goods by air.

AIRLINE PRICING STRATEGY — DYNAMIC PRICING

In Dynamic Pricing strategy, the price is not strongly fixed; instead it varies depending on changing situations, such as fluctuations in demand at certain periods, changes based on marketing conditions by targeting individual customer.

Demand-based pricing is the most common pricing technique in the airline industry that most of us might be very aware of. Airline fares are frequently at their highest during the holiday seasons or other periods of heavy demand, and the same seats are priced at even cheaper rates during the off-season.

The normal price division that we all know about in the aviation industry is focused on the economy, business, and first-class levels of the airline. The number of seats assigned to each level is normally modified by the airline carriers. The price of seat will jump to the next one as soon as one class is sold out. Airline companies use loyalty schemes for frequent flyers, and cookie monitoring in businesses to know their customers better because it will enable them to deliver customized pricing.

Few airline companies have discovered that the best opportunities to maximize fares in real time are through Projected Marginal Seat Revenue (EMSR). This approach is useful for not only on a particular route, but also taking into account the revenue-generating potential across entire airline network.

Increasing rivalry in the aviation market offers reasonable enough arguments for airlines not to overcharge customers. If there are vacant seats remaining before a flight departs, airlines appear to actively lower its fares.

COVID- 19 IMPACT ON AIRLINE INDUSTRY

In 2020, Coronavirus pandemic has created a huge impact on airline industry. Airlines’ sales sources were immensely poor, so that revenue could not meet operating expenses. This results high lose for the entire global aviation. Before starting of this pandemic, the aviation industry has seen steady growth over the last decade, which was indicating the likelihood of further development in the years to come. In the global aviation sector for example, sales increased between 2009 and 2019 at an annual growth rate of about 5.3 percent, hitting 838 billion U.S. dollars in 2019. During this time, the growing number of aircraft operating by different airlines worldwide helped in improving the financial performance of the industry.

Tourism industry has experienced huge growth in recent decades and has become one of the fastest expanding economic sectors worldwide. Over the decade, the industry saw a 59 percent rise in the arrivals of overseas visitors from 1.5 billion in 2019 compared to 880 million in 2009.

This strong past record of growth has started declined in 2020 after the outbreak of Coronavirus. Travel and tourism have been one of the most affected industries from the very beginning of the outbreak of the virus which enforced travel to control with the ground of airlines as well as other major transportation. Around 93% population in the world stays in Coronavirus affected countries where the travel has been restricted.

Due to the pandemic the arrival of international tourists has been decreased by 22% in the first quarter of 2020 and 65% decrease in the middle of 2020 as compare to 2019 statistics.

COVID-19 AND AIRLINE FAILURES

The financial forecast published in June by the International Air Transport Association (IATA) revealed that airlines are projected to lose $84.3 billion worldwide in 2020, with a net profit margin of -20.1 percent. It also reported that from $838 billion revenue in 2019, sales would decline by 50 percent and estimated revenue would be $419 billion in 2020. It is also expected that due to this Covid-19 Pandemic, global economy will be affected and GDP will decrease by 5%.

COVID-19 AND AIRLINE PRICING

Due to this pandemic, airlines in almost all the countries are expecting a huge negative operating income in 2020. To continue the operation and deal with the market competition, airlines are dramatically discounting ticket rates to boost travel as sales are projected to decline faster than demand. Most of the airlines are experiencing in reducing the operating cost as they are facing huge cash burn due to the fixed and semi fixed cost and other maintenance cost of the aircraft.

Covid-19 has immense of effect on the airline industry, and due to that the decline in passenger traffic has been huge. Most of the airlines have reduced 30% to 50% flights from the operations to reduce the supply as there is no demand. As per the analysis of Dollar Flight Club, there will be average of 41% decrease of domestic airfare and average of 35% decrease of international airfare through 2021. People retention and to deal with market completion, airline has to reduce the price of ticket. The airline also had faced the issue of cancellations, re-issues and changes in ticket etc. Due to that they have earned huge losses which impacted on customer loyalty program. To reduce the cost, airlines are downsizing their operations in smaller distance. If the airline has to give discount in trick price for smaller distance travel, that will incur more losses for them in current scenario. Though most of the airlines have reduced the number of operating flights, still the passengers will experience fewer flight delays and cancellations. But in current scenario, airlines have to reduce miscellaneous charges from the customer to reduce the churn rate. To reduce the operating cost, most of the airlines cut their routs and they have limited the features of customer comfort.

Recent decrease in fuel price somewhat helping the airlines to maintain balance in the ticket price. In 2020 the fuel bill for the industry is expected to decrease by $78 billion which is reflecting around 15 percent of the average operating expense.