Covid-19 and the Fate of the Airline Industry
When news of a new disease emerging out of China arose in the U.K. in January, travel demand to Asia from the rest of the world plummeted. Initially, travel demand to other parts of the globe remained largely unaffected, however, month on month this demand quickly started to deteriorate.
By April 2020, the International Air Transport Association (IATA) reported that passenger demand had plummeted by 94.3% compared to that of April 2019. IATA initially stated that in 2020, airline revenues could drop by $314 billion due to Covid-19, with further analysis warning that the figure could be as high as $419 billion in a worst-case scenario.
To help the airline industry survive, governments have put together stimulus packages. Some examples include the Bank of England’s £1.8 billion bailout loan for Ryanair, easyJet, British Airways (BA) and Wizz Air, as well as Donald Trump’s £58 billion bailout for the U.S. airline industry (comprised of a £29 billion payroll grant and a £29 billion loan). Many argue that these packages are not enough, and some airlines could go under if more is not done to help them.
A number of already struggling airlines declared bankruptcy when governments around the world were discouraging air travel. In March 2020 alone, Britain’s FlyBe went bust, along with the U.S.’s Trans States Airlines and Compass Airlines. Virgin Australia were soon to follow, and then in May 2020 Latin America’s largest and oldest airline, Avianca, also filed for bankruptcy.
The Effect of Bankruptcies
Questions are being raised how these bankruptcies might affect the structure of the oligopolistic airline industry. In 2018, a staggering 95% of the U.K. airline market was dominated by just 5 firms (easyJet, BA, FlyBe, RyanAir and LoganAir). If the U.K. government doesn’t provide more stimulus packages towards the airline industry, then only the large and already established airlines may survive these turbulent Covid-19 times. This could create a market which is heavily dominated by only a handful of firms, much to the detriment of consumers.
The U.S. airline industry suffers from a similar oligopolistic market structure, with 5 firms dominating 78% of the market in 2019. Although firms with a large market share tend to be more stable in industries with large sunk costs (e.g. cost of buying planes, airport rent etc.) they can lead to incumbent firms abusing their monopoly power. The fewer number of firms there are in an industry, the easier it is for firms to collude together and rip off customers. Back in 2008, Virgin Atlantic and BA were caught fixing fuel surcharges for passenger and cargo flights, leading to BA being fined £271.5 million whilst Virgin, who blew the whistle on the scandal, were not punished.
It is a serious worry that the Covid-19 pandemic could lead to more airlines declaring bankruptcy and thus there being fewer firms in the industry. This could mean more anti-consumer behaviour due to the incumbent firms being able to abuse their monopoly power due to the newfound structure of the airline industry.
I hope you enjoyed this brief overview of the affects Covid-19 has had on the airline industry. Watch out for an article next week which goes into greater depth on four specific topics within the industry – including flying taxis, and hydrogen fuel! Also, if you didn't read our previous article on how coronavirus killed the aviation industry, you can find it here.