COVID-19 and the Airlines Sector

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Table of Contents

Abstract
Introduction
Methodology
Results
Discussion
Conclusion
References

Abstract

The current COVID-19 pandemic has affected the world’s economy significantly because of social distancing policies that prevent many companies from working effectively. However, it is likely to have a particularly significant impact on airlines, which have lost a significant portion of traffic due to travel bans. Moreover, the industry is already known for its high rates of closures, mergers, and acquisitions as a result of the intense competition that takes place in it. This study conducts a literature review that explores the impact that COVID-19 has had on the airlines sector so far and the likely outcome of the crisis.

Introduction

The aviation industry generally struggles to resist external shocks because of its specific properties. Viral epidemics are particularly dangerous in this regard, as airlines enable rapid transit across the world, which enables infected people to arrive in new locations before the systems there are ready to respond. As a result, the current COVID-19 pandemic affects aviation particularly strongly, with many countries minimizing air traffic or banning it entirely.

The number of customers has dropped sharply for most airlines, and the canceled flights require refunds to be conducted. Many companies may have to adopt extreme measures to survive the pandemic, and numerous others will likely close. This paper will attempt to discuss the weaknesses of the airlines sector concerning epidemics and explain the impact that COVID-19 has had on them.

Methodology

The descriptive approach is appropriate because the research attempts to obtain an overview of the situation. The study will use a qualitative approach and conduct an extensive literature review and analysis. It is likely too early to attempt to quantify the impact of COVID-19 on the industry because the situation is still developing and will likely cause further damage. In line with this reasoning, the study will take on an exploratory design.

The sources used in the paper will include scholarly articles, books, and reports from non-commercial organizations. The criterion for their selection is relevance based on topics such as COVID-19, airlines, and epidemics, in general. Databases such as JSTOR and Google Scholar have been used to look for articles and reports. Google Books were used to find books that would be relevant to the topic, which the author would then procure in their entirety if available. Content analysis will be used to derive information from the gathered literature.

Results

The airline industry is currently in a volatile state due to its continued transition to a new model that follows deregulation. As Budd and Ison (2016) claim, following deregulation, low-cost carriers emerged and began taking the market share of traditional high-cost providers away with their superior prices. Their efforts succeeded, but then, these companies began competing with each other, and, in the absence of significant differentiating factors, they began lowering their prices, leading to a reduction in profit margins (Samunderu, 2020).

They also continue efforts to save costs and develop more efficient frameworks. As a result, according to Heshmati and Kim (2016), the industry is continually shifting, with many airlines struggling to survive in normal circumstances. External events that damage its operations exacerbate these issues, as airlines can struggle to produce enough resources to withstand such crises.

The perception of airline safety is particularly relevant to their performance, as people will generally avoid modes of transport that they consider dangerous. Vasigh et al. (2018) highlight how the 9/11 attacks led to a 9% reduction in U.S. air traffic and a $1 billion loss because passengers were afraid of terrorism. Similar events took place with tourists during the SARS epidemic of 2003, forcing the affected industries to save costs to avoid bankruptcy (Lowry, 2017).

Jaffe (2015) estimates the epidemic-related losses in the Asia-Pacific region at $6 billion, with American carriers losing another $1 billion, as a result of a 45% drop in traffic to China. As such, its impacts can be considerably more severe than that of the previous epidemic.

It should be noted that COVID-19 is related to SARS, as both are coronaviruses that cause similar symptoms. As such, similar considerations regarding their spread may apply alongside more general knowledge regarding epidemics. Sallan and Lordan (2020) note that diseases tend to transmit through airlines, which is expressed as a correlation between their spread and the airport network. Wuhan, the city where the first COVID-19 case was recorded, has a large international airport, which may have facilitated the spread of the disease (Peeri et al., 2020). Lewis (2020) adds that, rather than in-flight infection, the cause is that passengers leave their planes and go on to spread the disease in the city unchecked. As such, many countries put their focus on the monitoring of travelers who arrive from areas where the virus is known to be present.

It is not feasible to test every person who arrives from a danger zone for COVID-19 upon their arrival at the airport. According to Okada et al. (2020), thermal imaging has proved itself potentially useful, though it cannot detect patients who are in the incubation period. As such, countries such as France have instituted surveillance procedures, tracking COVID-19 patients and the people who came in contact with them (Stoecklin et al., 2020).

Zhang et al. (2020) provide some examples of how such contact tracing can identify cases without a history of travel to locations such as Wuhan. However, as Bai et al. (2020) state, researchers soon discovered that many cases of COVID-19 are asymptomatic and can avoid detection while still spreading the disease. Additionally, regions with poor societal functioning can struggle to identify and report cases of the disease, thus developing into unknown danger zones (Adiga et al., 2020). As such, neither of the measures described above would be enough to contain the virus entirely.

As such, governments started looking into more drastic ways to prevent the spread of the virus. Wilder-Smith et al. (2020) note that measures such as social distancing, which many countries across the world have implemented, have helped stop SARS but may not be as effective for COVID-19. As such, governments chose to implement additional measures that affected airline companies disproportionately, such as travel bans.

Chinazzi et al. (2020) claim that these policies have reduced the numbers of international case importations by 80% compared to the projection, though they have not stopped the spread altogether. As a result, airlines had to cancel most or all flights from China and to it, leading to significant loss of revenue (Hoque et al., 2020). This ban is likely to continue for a considerable period and expand to other nations with high incidences of COVID-19, such as Italy or the United States.

The effects of these policies on airlines have been severe and may escalate soon if the situation keeps becoming more severe. The COVID-19 situation has already led to a 72% drop in air traffic worldwide as of April 10 (Impact of COVID-19: Data updates, 2020). Companies are beginning to consider the prospect of bankruptcy and develop methods that will help them avoid the situation. Walulik (2017) claims that airlines will often merge to achieve cost savings and protect themselves when struggling economically.

Burke et al. (2020) propose another option for wealthy countries, in which the government can “take large equity positions in airlines and other businesses” to protect them from collapse until the economy stabilizes. Either way, many small airlines will likely cease to exist as a result of the COVID-19 crisis, and larger ones will become more prominent.

Discussion

In its current state, the airline sector is inherently unstable and volatile, as companies in it have to struggle with intense competition. With their low profit margins, they struggle to deal with costs in ordinary situations despite the continuing growth of traffic. As a result, any noteworthy economic disturbance leads to the closure of airlines, which are then acquired by others. A massive crisis, such as that surrounding COVID-19, is likely to have proportionally more significant effects. Travelers will not want to go elsewhere due to infection concerns, and nations will shut down routes, leaving some companies entirely out of business. With their lack of contingency funds and mounting costs such as those of maintenance and wages, airlines will likely not be able to survive until the crisis ends.

The shutdowns are necessary and unavoidable because of the specific properties of the new disease. It has a long incubation period and is often asymptomatic, which means that carriers of the disease can pass through current security measures undetected. As such, airlines represent a fast and long-ranged method for spreading COVID-19. They introduce people who complicate widespread methods of stopping epidemics, such as contact tracing, into populations.

Complete elimination of airborne traffic is the only cost-effective measure that a government can take to reduce the danger that the infection vector poses. As such, once the benefits of travel bans were confirmed, countries began to replicate the practice worldwide, leading to a massive reduction in traffic as only the essential routes stayed open. These routes will likely also shut down if one of the destinations develops the same situation as Wuhan.

Asian airlines are affected the most because of the bans many countries instituted for travel to China and from it, but carriers worldwide take significant damage from the situation. Smaller companies will struggle to survive the situation and try to merge into alliances or be acquired by existing ones. Large businesses will also likely require help, and, likely, governments that are interested in the preservation of their travel networks will bail them out.

Each option contributes to the reduction of overall competition in the industry, as the number of competing businesses becomes lower, and their economies of scale enable them to obtain advantages that increase the barrier of entry into the industry. The airline industry may become an oligopoly, where one or a few alliances work in a region and informally divide the world’s transit network into exclusive zones instead of competing.

While such a situation would be disadvantageous to travelers, it is possible to argue that the change is unavoidable and possibly positive. Ever since deregulation, the airline industry was struggling to develop a new equilibrium and may have collapsed. The current crisis may result in the reorientation of the sector into a more sustainable configuration that benefits both companies and flyers. A significant shock may identify the configuration that can withstand it best, which other businesses will then begin to emulate.

While the possibility that the industry will fail to develop a solution and collapse also exists, many influential stakeholders are interested in having it continue. As such, airlines have a safety net that they can use to survive the current crisis as an industry. There will likely be smaller local changes, but the industry as a whole will eventually recover and possibly work better than before.

Conclusion

The COVID-19 crisis has had a significant effect on the aviation industry, which is likely to become more severe before the pandemic becomes less severe. Airlines are highly effective at transmitting viral infections, and COVID-19 exemplifies this ability because of the properties that make it more challenging to detect. As a result, many countries are shutting the majority of their airborne routes to limit the speed at which the situation in their borders develops. Having lost the majority of their customers as a result and lacking the resources to keep operating until the crisis ends, many airlines are likely to reach bankruptcy soon.

As such, they will look for help, either through mergers or government aid. Both options create some risk that the industry will become an oligopoly, but it is also possible that a more sustainable arrangement than before will emerge.

References

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