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SINGAPORE: The spread of the coronavirus has had a tremendous impact on the travel industry.
With a vast majority of ground flights to halt the international spread of the virus, major airports such as Singapore and Dubai have seen passenger volumes drop.
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Airports continue to incur fixed costs to maintain infrastructure. Their burden is even higher because partners, such as retail outlets and airlines, have had breaks in terms of rents and reduced parking and other fees, respectively.
Although governments may share the cost burden of airports in the short term, it remains to be seen how long they will bear such responsibility.
A black swan event that has only gotten worse
It is true that the current crisis was a type of black swan event that could not have been anticipated.
Just a few months ago, in December 2019, the International Air Transport Authority (IATA) had forecast earnings of $ 29.3 billion for airlines in 2020.
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We must anticipate that, in the future, the future will be very challenging for airport hubs such as Singapore and Dubai because it can take a long time for the air transport industry to return to the passenger volumes it enjoyed before the pandemic erupted.
There is a clear possibility that passenger volumes will never return to previous COVID-19 levels. Even the financially sound Changi Airport (with capital stock and reserves of S $ 3.54 billion and retained earnings of S $ 4.29 billion in the last financial year) is treading carefully.
Changi Airport announced on Tuesday (May 12) that it will suspend Terminal 4 operations until a sufficient number of flights are resumed at the terminal. It had previously announced in April a suspension of Terminal 2 operations for 18 months.
Following COVID-19, Changi Airport has seen much less human trafficking. (Photo: Jeremy Long)
Great uncertainty has shaken projections of the prospects for air travel. In March, in a scenario of widespread spread of the virus, IATA projected a 19 percent loss in airline revenue in 2020, equivalent to $ 113 billion. They revised that estimate to $ 314 billion just a few weeks later.
According to a Dollar Flight Club survey, up to 60 percent of consumers in the United States are comfortable traveling internationally in the second half of the year, if travel restrictions are lifted. About 45 percent have a trip booked and have not yet canceled.
The same source predicted a 35% decrease in prices through 2021, and an average 27% increase through 2025 (compared to the 2020 price base).
WORSE THAN THE WORLD FINANCIAL CRISIS
Some of these projections were based on the experience of the global financial crisis and the attacks of September 11, but I remain much less optimistic about the prospects for air travel in general and airport hubs in particular.
A unique aspect of this coronavirus crisis is that it is primarily a public health crisis, which will leave psychological scars on the health risks of traveling and potentially contracting the virus.
Even if death rates turn out to be low in the long term, public perceptions of the health risks of COVID-19 may not change quickly or easily.
Although holed-up leisure travelers are more anxious than ever to get rid of the rising cabin fever and go exploring the world, they are unlikely to do so if this endangers their health, not to mention if traveling implies that be quarantined for weeks once I have landed at your destination.
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There are also two additional factors at work.
First, although young people travel the most of any given demographic, the elderly make up a considerable proportion of leisure travelers who take longer vacations. Extensive travel is an important part of the retirement plan for many retirees.
Regardless of the overall death rate of the COVID-19 virus, there is an overwhelming scientific consensus that the virus is more dangerous if it is contracted by older people. If the elderly are kept away from leisure travel, this will greatly affect the overall demand for leisure travel.
Second, the regulatory policies for the COVID-19 trip are still unclear. There is a school of thought that argues after COVID-19, airlines will be forced to keep intermediate seats empty for social distancing.
It is likely to lead to higher prices. Basic economic principles suggest that higher prices would reduce the demand for air travel.
This dynamic runs counter to the current of recent years, during which airlines were packing an increasing number of passengers on each of their flights.
BUSINESS TRAVEL IS NOT LOOKING GOOD
As for business travel, I am once again cautious about long-term demand and projections of a rebound for various reasons.
A Singapore Airlines travel notice at Terminal 3 at Changi Airport (Photo: Jeremy Long)
First, business travelers generally have to endure drawbacks such as fatigue, reduced productivity, and jet lag, which are mitigated to some extent due to the higher level of comfort in business and first class.
The threat of endangering one’s health will significantly increase the “costs” of these inconveniences. The eventual cost-benefit analysis for many business travelers probably suggests fewer air travel.
Second, during blockades imposed in many countries, many companies and employees probably would have realized that while technology solutions like video conferencing cannot completely replace face-to-face interaction facilitated by air travel, they do impose lower cash costs. and drawbacks.
I think a significant part of the demand for business travel will permanently shift to video conferencing.
Third, in the post-COVID-19 world, companies are likely to be cost conscious due to challenged profitability. Business trips are discretionary expenses that can be easily reduced when companies seek to save costs.
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BUT AIRPORTS HAVE IT HARD
The above analysis does not mean that pleasure or business travel will go to zero. In fact, even a 10 percent decrease in demand will inflict a lot of pain on companies like airlines and airport operations, due to their high fixed costs.
Air hubs like Singapore, which rely on transit traffic, are even more vulnerable.
According to IATA, airplanes have excellent filters and frequently cool the cabin air, posing little risk of infection. However, airports are another matter.
If travelers are concerned about contracting infections at the airport, they will exhibit a strong preference for direct flights compared to those involving transit, which will affect the volume of passengers in centers such as Singapore or Dubai.
Health workers do a blood test at Dubai International Airport on May 7, 2020. (Photo: AFP / Karim SAHIB)
In fact, airlines may have a few more degrees of freedom to face the challenges in the post-COVID-19 environment compared to airports.
Some airlines are already shutting down their businesses (thereby reducing alternatives and competition), survivors may share code (thereby reducing costs and supply), and airlines may find new ways to charge customers for the amenities provided sitting in the past (for example, inflight entertainment).
Meanwhile, airports will experience a reduction in passenger volume, even if airlines face the new environment through past strategies, affecting not only landing, parking, and other charges that they would normally charge airlines, but also to the airport’s retail and food and beverage revenue streams.
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So again, maybe it’s not that bad
There are two caveats to the above analysis. The first concerns how long people will remember the COVID-19 crisis and its health implications.
If public memory is short, air travel volumes could quickly recover. But I think the memories of COVID-19 will be long lasting, although no one knows the exact answer to this.
Second, the coronavirus-related regulations (for example, the rules on middle seats) may not be as strict as expected at this time.
After September 11, people complained about the cumbersome additional screening procedures, but except for the initial complaints, which did little to dampen the eventual lawsuit within a full year.
Still, I think that even with these caveats, the future of airports, especially hubs like Singapore, will be an incredible challenge.
So what could central airports like Singapore and Dubai do? I would recommend putting expansion plans on hold.
People in protective masks walk in Singapore, March 30, 2020. (Photo: Reuters / Edgar Su)
I would also suggest investing only in those initiatives that lead to productivity improvements and avoiding making airports more luxurious, projects that airports like Dubai and Doha have undertaken
Finally, I would also suggest avoiding debt financing and conserving capital for rainy days or for a time when uncertainty about the future of air transport is resolved.
In addition to financially strong airports like Changi, other airports make extensive use of debt financing.
Airports frequently turn to capital markets to finance long-term construction projects. Bond revenue is the main source of funds for the airport’s capital needs, and represents approximately 54 percent of total funds historically, according to the International Civil Aviation Organization.
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Nitin Pangarkar is an associate professor in the Department of Strategy and Policy at the National University of Singapore School of Business and author of Flying High in a competitive industry: Singapore Airlines.
