May 19 2020
COVID-19 (coronavirus) is the most significant challenge the travel sector has faced in almost two decades. Since the start of March 2020, the coronavirus has triggered a near-total shutdown in international travel to and from the United Kingdom. As demand and passenger numbers fall, the International Air Transport Association (IATA) has warned airlines across the globe would lose £215 billion in revenue over the year through December 2020. UK airlines have responded by curtailing flights, shifting their focus to conserving cash and finding alternative funding.
Even as lockdown measures are eased, the pause on international travel is likely to linger and the short-term outlook remains bleak. Some industry officials believe international travel numbers will not reach pre-pandemic levels until 2023-24. While passengers are expected to initially return in low numbers, demand for international travel will still exist, but those operating in the travel industry will need to adapt to the changing landscape.
The story so far
Restrictions on movement and business operations have forced the industry into turmoil. Across the United Kingdom, passenger numbers and revenue have plummeted for major airports and airlines. According to flight tracking website Flightradar24, 90% of flights have been grounded since the United Kingdom went into lockdown, with only 711 recorded departures from the UK's 10 biggest airports between 20 and 26 April 2020, compared with 7,865 in the week up to 23 March 2020. Meanwhile, over the three months through 31 March 2020, International Airlines Group (IAG), which owns flagship carrier British Airways, among other notable names such as Iberia, Aer Lingus and Vueling, recorded a loss of €535 million (£465 million), compared with a profit of €135 million (£121.5 million) over the same period in 2019.
In response to failing demand and growth prospects, airlines have shifted their focus to conserving cash and finding alternative funding. At the end of April 2020, British Airways placed more than 22,600 workers on furlough and announced 12,000 redundancies, while other airlines, including IAG and the UK’s largest budget airline operator, easyJet, have sought the help of the government's coronavirus corporate financing facility. Numerous airlines were already operating at a loss pre-pandemic and the crisis has exacerbated existing pressures, with FlyBe entering administration in early March 2020.
The Coronavirus Job Retention Scheme has been extended until the end of October 2020, suggesting social distancing measure and travel restrictions are likely to remain in place for the foreseeable future. Despite an initial pledge of support from the Chancellor, British airlines and airports have been told they will not receive an industry-wide bailout, and have called on the government to suspend Air Passenger Duty, fees for air traffic control services, and levies and tax on passenger tickets. Negotiations are still ongoing.
Even as lockdown measures are eased, the pause on international travel is likely to linger and the short-term outlook remains bleak. Airfares are likely to fall as companies try to stimulate demand. According to the IATA, prices were cut by 41% when China’s domestic market re-opened in April 2020.
Beyond depressed prices, airlines face more structural changes. Countries are focused on staving off a second wave of the coronavirus, with authorities prepared to shut down borders if the virus re-emerges, and any reopening of borders would likely be very gradual. Flight schedules will be unpredictable and subject to short-notice cancellation and rescheduling as a result.
Meanwhile, the UK government has advised those able to work from home to do so. Even as measures are eased, airlines are likely to have to contend with a lasting behavioural change. Businesses will become accustomed to virtual meetings and are expected to reassess the necessity of corporate travel, reducing the number of those sent abroad to minimise the risk of infection and help to maintain budgets.
Consumers, too, will remain cautious over the risk of infection. A survey from the IATA found that 40% of recent travellers anticipated waiting at least six months after the coronavirus is contained before flying again. Additionally, for those placed on furlough or made redundant, tightening disposable income is expected to discourage non-essential expenditure in the short term, including money spent on travel.
Further, on Sunday 10 May 2020, the UK government announced a two-week isolation period for those arriving in the in the country by air travel. If enforced in both departure and destination countries, individuals would spend a total of a month under lockdown, effectively discouraging most business and tourism travel. British Airways had initially planned to run 50% of its flight schedule from July, but is currently reviewing plans following the announcement of potential new quarantine rules.
In the short term, social distancing and hygiene measures are likely remaining in place to mitigate the risk of coronavirus transmission. The UK government has issued recommendations passengers to wear a face covering and London Heathrow is in the midst of trialling large-scale temperature checks. When available at scale, COVID-19 testing and immunity documents or passports may also be introduced.
Some airlines, such as easyJet, have temporarily blocked the middle seat to reassure customers about personal spacing, although this is a short-term measure. By blocking out middle seats, airlines would be operating at 66% capacity, raising unit costs while reducing revenue per flight and threatening the viability of some flight paths. Social distancing measures are likely to present significant cost pressures for the foreseeable future. That said, these measures are only temporary and international travel is likely to display a more profound change over the long term.
The new normal
While initially returning in low numbers, demand for international travel will still exist and those operating in the travel industry will need to adapt to the changing landscape. Airlines and passengers are likely to witness a reduced flight schedule and smaller fleets. Short-haul flights traditionally used by business travellers may no longer be viable, while budget airlines are likely to face the brunt of consumers postponing going on holiday. Virgin Atlantic has already announced it will stop operating from London Gatwick, and British Airways stated it may not return to the hub after the pandemic.
As such, market share concentration of flagship carriers is expected to increase as fewer routes push travellers to larger airports and encourage the adoption of codeshare flights as airlines seek to cling onto valuable flight paths and landing slots. Merger and acquisition activity may rise as flagship carriers acquire smaller airlines, routes and docking bays, and smaller firms merge to maintain market share. Overall, a restricted flight schedule and rising market share concentration will reduce competition, potentially resulting in higher airfares in the long term.
The consumer experience is also likely to change, with an increasing focus on technology and touchless travel to increase hygiene. Manned check-in desks, bag drop offs and security checks at departure gates are likely to be replaced by automated equipment that uses biometrics systems such as face recognition as touching physical infrastructure in airports becomes a faux pas. Smartphone apps are likely to become more essential to travel as the adoption of electronic boarding passes and flight notification updates increases and touchless travel becomes the new normal.
IBISWorld industry reports used in this special report:
H51.101 - Scheduled Passenger Air Transport in the UK
H51.102 - Non-Scheduled Passenger Air Transport in the UK
H52.230 - Airports in the UK
SP0.068 - Budget Airlines in the UK
UK0.038 - Corporate Travel Services in the UK