Will domestic travel save the airlines?

Nine months into the COVID-19 pandemic, good news is hard to find in the travel sector. International traffic continues to be virtually at a standstill with a -72.3% degradation in the calendar year to date, according to newly released International Air Transport Association (IATA) figures. Domestic traffic, which accounted for 36.2% of total worldwide traffic in 2019 (source: IATA 2020), is down -51.25% and is showing ‘green shoots’, but it is a patchy and hesitant process.

Pre-pandemic, the USA was the world’s largest domestic market, with 811 million passengers carried in 2019 (US-DOT figures), which was 14% of worldwide traffic (IATA). While comparable data is hard to find due to differences in reporting, China flew about 551 million domestic passengers, making it the world’s second biggest market with 9.8% of total capacity. The European Union reported that out of a total of 1.034 billion passengers in 2019, 50% (517 million) were intra-EU or national, a figure that includes the UK. India came a distant fourth with around 171 million domestic passengers. Brazil with around 95 million internal travellers (1.1% of worldwide capacity) was next and Australia, though having a small population, flew 64 million domestic passengers in 2019.

Wide disparities in the recovery

Post-pandemic most domestic networks are in tatters, carrying a small fraction of the previous year’s traffic. The USA is particularly bad, as the pandemic seems to be raging out of control. The US Department of Transportation reported that US domestic demand was down 60% and international demand down 77%. TSA data of passengers screened at airport checkpoints appears to show a much sharper drop, with the daily number of two million a day average in October 2019 plunging to less than 600,000 in October 2020.

However, China has seen a surge in demand, with capacity on domestic flights reaching 97% of 2019 in September, according to IATA. New Zealand, which has essentially eliminated the virus, showed travel approaching 90% of pre-pandemic levels. Previously a significant proportion of domestic travellers in NZ were foreign tourists, but with the borders still closed Kiwis are obviously travelling themselves.

Down-under

In Australia even internal state borders were closed until December, provoking an 88.7% drop in passengers as of September 2020. But since then, with the virus effectively controlled and no reported community transmission in over a month, borders have reopened. Demand is high and domestic capacity is forecast to be at 90% by January, which is the peak southern summer travel season. While Australia welcomes New Zealanders into the country without a need for quarantine, the reverse does not apply. Bizarrely, Australians and even Kiwis returning after a visit to Australia, have to quarantine for two weeks on arrival in Auckland. This has effectively has squashed any hopes of a trans-Tasman ‘travel bubble’ for Christmas.

Air NZ has received huge government bailouts to remain in business. Australia on the other hand has not offered much state help to its airlines. Qantas, with a huge cash reserve, is confident of the future, though CEO Alan Joyce has stated that he does not expect international flights to resume until Q3 2021 and that a vaccination certificate will be a pre-requisite for travel. Both Qantas and rival Virgin Australia (VA) have announced deep cost cutting measures, which include significant numbers of staff made redundant.

VA went into voluntary bankruptcy at the start of the pandemic and since then has a new owner, US private equity firm Bain Capital. A new CEO, Jayne Hrdlicka who was previously with rival Jetstar Australia, has just been appointed. With a rationalised structure, a reduced and simplified fleet of aircraft plus a new business plan, VA is set to regain its market share and compete with Qantas.

To complicate matters, Regional Express (call sign REX), which operates over 50 Saab 340 turboprops on routes to country Australia, has announced the acquisition of several Boeing 737s. REX intends to compete on the primary Melbourne-Sydney ‘trunk’ route, estimated to be the most profitable of any city pair in the world. REX intends to increase the fleet and compete on the Brisbane route too as traffic builds.

Capacity vs. Yield

While flight capacity is being rebuilt, the yields are still far below what they were. Cheap ticket prices and other incentives to lure travellers back to the air have meant that the airlines will continue to lose money. Actual yields in the domestic Chinese market tend to be opaque, but certainly in Australia and NZ prices are still well below break-even for Qantas and Virgin. 

Meanwhile in India, which is still facing the brunt of the virus, domestic travel is slowly returning. Ronojoy Dutta, the CEO of Indigo Airlines (IGO), was recently interviewed at the CAPA Regional aviation summit. Indigo had 52% of market share pre-pandemic and is easily India’s largest airline. With almost 600 aircraft on order (read an analysis here) it is a huge and ambitious regional player.

Intriguing opportunities

Dutta reports that he expects Indigo’s domestic schedule to be at 80% of previous levels by the end of December. International traffic was a small part of Indigo’s traffic mix, and the drop in fuel prices plus the surplus of available crews has been an opportunity for the company. He reported that training is proceeding at full speed and new aircraft deliveries will be honoured with the fleet continuing to grow.

Having previously a senior executive at United Airlines for a long time, Dutta has a keen grasp of both the US and Indian markets. He foresees more point-to-point travel post-pandemic as passengers will be reluctant to travel through ‘hub’ airports. Announcement of new routes such as San Francisco-Hyderabad and Seattle-Bangalore, have been recently announced by major US airlines, showing a possible path ahead. IGO has plans to expand internationally once the new long-range Airbus A320XLR aircraft are delivered, bringing northern Europe within range of flights from Delhi, the main base.

No ‘magic bullet’

Air Asia (AK) CEO Tony Fernandez was also interviewed by CAPA. Air Asia has units in Malaysia, Indonesia and India; all three countries have suffered badly with COVID. Fernandez also pointed out that his company faces ‘irrational competition’ from state-subsidised national airlines. Perennial money losers, these companies have depressed yields and have not shown a profit for many years, yet continue to operate.

Fernandez does not anticipate a surge in traffic as the vaccines for COVID are released. He pointed out that Asia will not receive many early doses and the process of vaccinating the large populations in these sprawling nations is likely to take many months, if not years.

So as the worst year in the history of the airline industry comes to a close, we see little light at the end of the tunnel. The earliest we will see a return to ‘normal’ international travel at pre-COVID levels is the northern winter of 2021, but even that is far from certain.