Airlines stare down dire future
This Is the Most Dire Prognostication on the Future of Airlines … and Travel how slow the recovery in travel will happen, how this is a generational break from the past, how we may have already seen peak travel in various parts of it, how much of the demand may be permanently lost, and how long it would take for recovery to come close to pre-Covid levels (maybe a decade, maybe never?) ............. the dire fundamentals facing airlines carriers in the post-coronavirus world, how it will spawn a complete mayhem in the industry, and why it is the top airline executives, and the investment community that invests in them, who are deciding to ignore the obvious. ............ The airline industry is in denial about its imminent collapse and the reasons why that is. ............ proposes a solution on industrywide restructuring of the airline sector ........... “The industry, capital markets and the business press have willfully ignored the actual magnitude of the collapse and remain wedded to absurd narratives that falsely assumed rapid, robust demand recovery. The industry and government officials who are actually dealing with the crisis have been myopically focused on narrow objectives (e.g. protecting the financial interests of select investors, minimizing direct government payments to workers). ............. “In the U.S., it is not clear that the competence to oversee an industry-wide restructuring focused on overall economic welfare exists anywhere in the federal government.”
Hubert Horan: The Airline Industry Collapse Part 4 – Total Paralysis Continues
Alphavid: The airline sector is in denial about its imminent collapse He puts this down in part to duopolistic and monopolistic structures (driven by decades’ worth of industry consolidation) that have reduced any incentive for the sector to properly restructure itself in the face of 85 per cent declines in revenues due to coronavirus. .................. Barring the miraculously rapid development of an effective vaccine, no international airline companies are viable going concerns. ............. a situation where worldwide demand has totally evaporated.
Hubert Horan: What Will it Take to Save the Airlines? the airlines need a deep restructuring, including a much greater focus on operational efficiency, to have any prospect of being self-supporting. Yet he deems the industry to be dead set against these changes and the US both unwilling to and incapable of imposing them. So we’ll have the worst of all possible worlds: permanent corporate welfare queens that get to keep private sector executive pay and perks. ................ Coronavirus has created the greatest challenge the airline industry has ever faced. For the large legacy carriers serving intercontinental markets, the threat is comparable to the meteor that caused massive climate change and drove dinosaurs into extinction. ......... the coronavirus meteor. ................. US airlines filled 85% of their seats in 2019 (up from 58% when the industry was deregulated and 70% 20 years ago). Once an airline has committed to the costs of operating a given schedule, almost all of the lost revenue from a shortfall of passengers directly reduces the bottom line. ............ Traffic through TSA checkpoints in US airports was down 96% versus the year before in mid April and 88% in mid-May. ........... Never before has flying on an airplane required accepting serious medical risk. ......... the idea of a rapid, “V-shaped” recovery to the January status quo seems wildly improbable. ............ the massive short-term substitution of videoconferencing may reduce business travel for years to come. ......... Cross-border travel bans have been key to slowing the spread of the virus, and the point where the mass market is no longer concerned with the health risks is somewhere in the distant future. .......... capital markets will be a major obstacle to the major restructuring the industry desperately needs. ............ An industry based on open collusion and protected by huge entry barriers will not produce those improvements. ......... Approval of the domestic mergers and intercontinental alliances had been justified by the false claim that the current existence of three competitors is all that is required to indefinitely provide consumers will the full benefits of competition. The coronavirus crisis provides a painful demonstration why that was never true. .......... The airline bailout requests that led to the CARES Act clearly indicate that when the crisis began both the industry and Congress expected a fairly rapid “V-shaped” demand recovery that would protect the current owners of the major carriers. .................. The current revenue (and medical) reality demands an immediate move to bankruptcy protection for most carriers and an industry-wide restructuring program. The industry’s 2019 status quo cannot survive. ................. Bankruptcy is needed to protect assets that will be critical to the (much smaller) reorganized industry from short-term creditor claims, and to ensure that current owners and insiders cannot divert scarce cash into their own pockets. ........... One model for an industry-wide restructuring program is the U.S. Railway Association, a temporary Federal agency that successfully reorganized the bankrupt freight railroads in the Eastern US in the late 1970s. .............. the many political obstacles that will likely prevent the needed restructuring from happening. ............. All efforts by airlines and Washington to deal with the crisis appear to have been entirely focused on protecting the owners and the future equity value of the incumbent companies, which totally precludes any consideration of the major downsizing and industry-wide restructuring that is actually needed. This is consistent with Washington’s overall emphasis on helping the owners of politically organized large corporations while providing only token support for suppliers, small business and workers. ................. Even if one argues that programs designed to protect the 2019 status quo for a couple months until a powerful “V-shaped” demand recovery occurred was a plausible position in March, it is now a delusional fantasy. Subsidies for the status quo will waste billions that could be used to allow the future industry to reorganize with more capacity and jobs. But the only people at the table discussing the future of the industry are executives totally dedicated to protecting their shareholders and Washington officials who see the interests of capital accumulators as superior to all other economic interests. .................. Between 2014 and 2019, the big 4 airlines used $42.4 billion of the cash they had generated to repurchase stock. The combination of stock buybacks and increased leverage (between 2016 and 2019 debt increased from $47 to $75 billion) was designed to inflate short term stock prices. This was done at the direction of these four boards, who had incentivized the four CEOs with $431 million in stock based compensation. Stock buybacks exceeded the free cash flow these airlines were generating, and increased even as key financial metrics began declining. ............... The ability to deal with major industry crises always depended on government agencies tasked with representing broader public interests and judicial processes tasked with upholding evidentiary standards. But they also depended on the ability of capital markets to allocate resources based on objective information about corporate efficiency. The economy’s ability to deal with the airline industry crisis has not only been compromised by the capture of oversight and bankruptcy processes but by the conversion of capital markets into a political utility disconnected from the real economy. The staggering cognitive dissonance between airline equity values and the actual evidence about airline economics suggests a level of “market failure” that may make the desperately needed industry recovery impossible. ............ the best interim solution may be to convert the industry to a regulated public utility for several years How Airline Alliances Convinced Regulators That Collusion Reduces Prices In the space of just a few years, the North Atlantic, the world’s biggest aviation market, was converted from robust competition to a permanent oligopoly/cartel of three collusive alliances. By design, the consolidation of the North Atlantic, in turn, forced a wave of mergers that consolidated the domestic US market (the world’s second-largest) and forced most Transpacific and Latin American long-haul airlines to align with one of the three collusive groups. ............... The Airline Deregulation Act’s focus on maximizing long-term consumer welfare was reinterpreted as the basis for DOT policies favoring the largest, most politically influential companies. ........ from 2003 onward, a totally new pattern emerged, with North Atlantic fares rising three times faster than domestic fares. ............... This fundamental shift in pricing behavior exactly tracks the move towards extreme North Atlantic concentration, which started when Air France announced its intention to acquire KLM, previously the largest single driver of price competition in European long-haul network markets. ............. They mounted a massive political attack on the three independent Middle Eastern hub carriers (Emirates, Etihad, Qatar) even though their network overlap was extremely small .......... Backroom deals between government officials and the largest incumbent carriers have not just distorted market results, but have destroyed the corporate value of smaller competitors. ............. Government policies are no longer established by legislation based on extensive public debates and detailed analysis of objective evidence about industry economics. ......... International aviation presents a useful case example of the utter failure of competition policy and antitrust administration. Clearly written laws were ignored by senior officials of both Republican and Democratic administrations who employed falsehoods and serious misrepresentations without consequence. ................ absolutely no one in the legal or economics professions or the business media seemed the least bit troubled. .............. The people who now control the industry are the ones who spent the last 15 years undermining competition, maximizing artificial oligopoly market power in order to generate readily extractable cashflow, misallocating capital to less efficient airlines, and ensuring the hegemony of investors pursuing short-term capital appreciation over customers, workers, suppliers, local communities, and every other longer-term stakeholder.
