Aviation: Struggling but Adapting

The aviation industry is gasping for air. Flights have been cancelled. Customers are demanding refunds. There is no end in sight. The sharp decrease in aviation stocks, the cries for help from senior aviation figures, and the looming bankruptcies of companies, paints a gloomy picture.

This article will outline four related stories to the industry; covering the positive (flying taxis), the negative, and hopefully giving an insight into the future of the industry, an industry which will have to adapt if it wants to last in our new world.

Locations that have suffered

Boeing’s warning that the aviation market will not recover for three years paints an ominous picture for any city’s economy that relies on air travel.

One such town that has suffered is Slough, near Heathrow. Local business owners suggest that business in locations near Heathrow has fallen by up to 90 per cent. This comes at a time when flights at Heathrow are down around 60 per cent compared to last year, which has left the airport seeing millions fewer passengers. This lack of business has huge knock on effects for economies.

The scale of the problem in Slough is evidenced by the fact that 34 per cent of workers were on the furlough scheme for at least three weeks between March and July, ranking the town the 4th highest user of the scheme in the country. The highest proportion of furloughed workers was in Crawley, another location that relies on the U.K. aviation industry, so clearly aviation towns have been hit hardest.

Therefore, it is great news that the furlough scheme has been extended for people in these areas that have relied on it so badly. However, longer term, the future of aviation looks dire, and as such many are calling for the government to consider putting in place extra financial support for those working in the aviation industry. In the meantime, Slough council is trying to reskill workers into the construction sector, showing the lack of optimism people have for the aviation industry, but also evidencing optimism for the construction sector. One can only hope the economy does not dip into another recession, as that could spell disaster for the whole of the U.K.

Money Pumped into the Industry (still)

Despite the doom and gloom, there is strong evidence showing that the industry itself is too big to fail. News from the FT on 25 August that Virgin Atlantic was getting a ‘£1.2bn rescue package’ showcases this.

A group of about 170 companies backed the rescue package, which came at a time whereby the airline warned they would run out of money by September 2020.

Recalling that Virgin Atlantic only restarted their flights in late July, and as of writing this in November, flights are nowhere near capacity, the vast sum of money is clearly needed. The company will be bleeding money and will continue to do so for some time with the recent U.K. lockdown 2. However, the fact that creditors are pouring money into the business shows the more optimistic long-term outlook.

Unlike their rivals British Airways and easyJet, Virgin Atlantic did not get access to U.K. government cash at the start of lockdown. This partly explains the size of the cash sum needed. However, British Airways themselves have recently (October 22nd) decreased their flight numbers as their operations lost over 1bn euros in the third quarter. Evidencing that this crisis is hitting all companies, regardless of government injections. With IAG (British Airways’s owner) gaining a 2.75bn euro cash injection through a rights issue, huge sums are still being poured into companies. However, it will be interesting to see how much longer companies can continue to hold their big amounts of liquid capital.

The Future of Flying

Having some money in Scottish Mortgage Investment Trust (SMT) has left investors with sizeable investment gains recently. So, when investors saw the managers throw money into Lilium, a German aviation company (a flying taxi start-up!), many were excited.

Baillie Gifford, the group SMT are a part of, now has a 4% stake in the start-up, valuing the company at over $1bn. Whilst also holding a stake in Joby, a similar Japanese based car company.

Lilium aims to have a five-seater air shuttle by 2025. This project has the potential to be a really transformative time in the aviation industry, however, only time will tell if the technology for these type of flights will succeed; and whether there will be a demand for it (as you would think that the price point will be particularly high).

Considering SMT’s success, with the trust investing in the likes of Tesla, and Amazon at their early stages, there is great potential here. The trust aims to invest in long term emerging sectors, and with the trust growing investors’ money over tenfold in the last decade, investors should be optimistic. These results should leave individuals investing in Lilium feeling optimistic about their investment.

Aviation Emissions

To finish, Airbus’s announcement of a hydrogen-fuelled passenger plane. Considering that I have written articles on hydrogen, and the failings of oil and gas, this evolving situation is at the forefront of both the energy and aviation sectors, and one that you should be excited about.

With all industries being pushed to curb emissions, the aviation industry, an industry that produces vast quantities of emissions, is one of the worst culprits in this area. Hydrogen fuel is the answer.

The details of the project are limited, however let us consider why this project will be so challenging, and yet so vital.

Firstly, McKinsey believes the cost per passenger could rise by as much as half if hydrogen fuel is used due to the extra space needed on flights to store it. This is very uneconomical, and thus this problem will need to be solved by Airbus if they are going to make these planes more than a one off event.

Despite this, Airbus says that hydrogen has the potential to halve aircraft emissions, with McKinsey stating that hydrogen could be used in 40 per cent of aircrafts by 2050. These are optimistic figures, however, it shows the importance of developing hydrogen fuel technology early so that companies can stay ahead of the game.

The finished result is still a fair distance away though. On top of the technologies that need to be created, safety concerns will be at the forefront of agendas. Legal firms, such as Clyde & Co, will have their work cut out to make sure that these projects are safe from start to finish – whether that be the production, storage, or use of the fuel. Only time will tell us if the future of aviation is hydrogen fuel, but Airbus’s announcement is a good start.

End notes

Long term, individuals should be optimistic about the aviation industry, despite the short-term problems. Whether towns reliant on aviation will soon be skilled in other ways, or if we will soon be in flying taxis or hydrogen fuelled aircrafts, only time will tell. The industry will need to adapt quickly to survive, but hopefully this article has shown that the industry has room to manoeuvre and continue to succeed.