Summary
Yesterday, Boeing launched a $25 billion bond issue -- it was snapped up by investors, not because the company is sound, but because its too big to fail, its part of the US military complex (Yeah) and investors are convinced that the government will bail them out (maybe). Investors have made the cynical bet that the US government will bail them out... The one certainty is that until a vaccine is found international travel will be curtailed and complicated.
I strongly believe that business travel will reduce appreciatively after a few months of “Zooming” and that most business people will appreciate this new reality. I suspect that this crisis is going to make things for Boeing very uncomfortable, and may even push the company into Chapter 11. A fitting end to a company that has been grossly mismanaged over the past decade. Airbus has its own challenges, the write off of the A350 would make a massive hole in the company’s balance sheet (and that of its partners).
As for the airlines, they remain generally unprofitable and that is the universal truth of that sector. Profit has always eluded them and by the regulated nature of the business, travelers will always seek the lowest price “all bleach are alike”. Low-cost carriers may well rule the skies, but that too is unknown – especially as fights will emerge for narrow-body aircraft (that’s a whole other issue).
The major factors
1. Is 9/11 a model for the restart
2. Is there a way of “cleaning aircraft”
3. B737MAX is dead?
4. Death of the hub and spoke model
5. The death of widebody aircraft
6. Low-cost carriers – their future
7. Winners and losers
8. WWBD: What would Buffet do?
8. WWBD: What would Buffet do?
What happened after 9/11 – is that a good model?
The period after the 9/11 disaster represents a starting point for the industry’s recovery from the Covid-19 pandemic. However, many aspects are different – there is no “fear of flying” as there is a “fear of catching a covid-19”. In fact, after 9/11, long-distance domestic flight returned more quickly than short-haul because of the fear of flying and obviously the “painfully cinematographic” enhanced airport security. However, short hops (less than 1,000km) never recovered as car substitution turned regional air travel into a high-priced business traveler-focused segment.
In the case of this crisis, International flying is likely to be the slowest to recover as it will be simple for governments to require “proof” of heath before flying is authorized – this may give rise to “health passports” but again this is an unknown. Therefore it should be easy to expect that international travel will be the slowest to return to its previous levels. What travel will occur will be serviced by extra-long-range narrowbodies.
Impact 1: Widebody aircraft will suffer the most( A350,A380, B777, B787) – biggest winner may be Airbus’ new A321XLR which is due in 2021
Impact 2: The creation of “Health Passport” is almost certain to occur and be a required document within the next 18/24 months for unrestricted flights (no idea how it would work)
Is there a way to clean the aircraft
It seems almost certain that non-invasive methods could be used. The idea of using a ultraviolet lighting system to “sterilize” aircraft seems the easiest to implement and a sure winner. Eventually virus resistant surfaces will be added to aircraft but that will take some time. This seems to be the easiest and most certain way to remove any virus in aircraft, the technology is mature and simple – and an easy cost to absorb for the industry.
Impact 3: Airline industry will become far more aggressive about air filtering before it is sent “back” in the cabin – there Boeing stands to win since they’ve always been more aggressive in using “fresh air” in the cabin. Some of the technology being developed by Tesla could very well be applied here – Retrofit issues here are not inconsequential – this is a longer-term solution.
Is the B737MAX dead?
The potential death of the widebody aircraft may force airline to re-purpose their bigger aircraft will more spaces between seats. However, the airlines will be looking to cut the number of available seats (fleets will be trimmed) so that its more than likely that the B737MAX is now dead and will remain dead – at least until Boeing designs a new wing (which they should have done instead of giving $30 billion to their shareholders – end of rant). At any rate, it will take months before Boeing products are approved by the European Aviation Safety Agency (EASA) – they will no longer get the automatic FAA pass they got in the past.
Impact 4: Boeing is in trouble, because its widebody aircraft are no longer attractive to the industry, and because the B737MAX needs a new wing (at least 3 years)
Hub and Spoke model – Is it dead?
The death of the H&S model has long been touted and still it remains in place, legacy and inertia are the reason, moreover, the equipment was often driven by the hub and spoke models. Even in Canada, Air Canada made Toronto its hub, despite it being Canada’s most expensive airport. Hubs are usually close to large business centers, there is a reason that America’s hubs are in NY, Houston, LA and Miami. The business class ticket buyers pay for a large percentage of the infrastructure. However, transit has/will become an issue with fears about the covid-19; security checkpoints get people into large groups for long periods of time in relatively enclosed areas.
The potentially slow revival of the international air travel will affect the H&S model more than any other issues – also its easier to operate smaller aircraft from secondary airports. More telling will be how the low cost carrier take over the skies; their direct point to point is certain to be popular.
Impact 5: Will the H&S system dies – still up in the air, it could be dead. Will people really fly to London on a 737/320 aircraft?
The death of the wide body aircraft
There is no doubt that the A380 is a disaster; in the late 1990s I was part of one (of many it turns out) teams that looked at the demand for new wide body aircraft – in this case it was a request from Boeing. We analysed the growth of markets and we could not find a global market for more than 500/700 widebody aircraft over the next 20 years. The reason we gave was the death of the hub and spoke model! In fact, it has happened to some extent, over the years new flights to peripheral cities were added – with higher yields.
Everyone was surprised when Airbus went ahead with the A380 – mainly because Boeing could not justify retooling the B747 line to make the second level for the entire length of the aircraft (with a new wing…). That program would have cost nearly $5.5 billion – instead Airbus spent around $30 billion to develop the A380 (and the A350 its smaller cousin). The A380 was already dead before the crisis – when Singapore airline “scrapped” a 10-year-old A380. For Boeing, the 777 and the 787 are its profit center (and with the 737 in trouble) it’s hard to see how Boeing can recover.
My guess is that the B787 and B777 and A350 will persist but there will be no new model – they will continue to manufacture to recover the rest of their development costs, but that Boeing and Airbus will both focus more on the narrow body (maybe small wide body too – like the 767 size)
Low Cost carriers – the future of the airline industry
Business will be slow to return to the air, the facts are that it’s a lot easier to get on a Zoom conference call to Dublin, than to fly there from NYC…that’s a total of 2 days for a one hour meeting. Not only as a cost-cutting measure, the new reality of efficient conference calls will change business for ever, sure meetings will still occur, but what “banker” will want to spent 200 days in the air, when he can spend only 20…trust me most would stay put. The low cost carriers’ point to point model will fit in the tourist segment and may eventually be part of the business world too.
Low cost carriers can usually quickly add or remove routes and change systems – that will be to the advantage of incumbents. In a timely fashion, both Wizz and Ryan Air have announced the return of the summer schedule…we will see if that works out!
Winners and losers
That’s the hardest to determine. So many factors have to be considered but there are certain factors that need to be taken into consideration: first and foremost who is the best capitalized and who is the most nimble. My guess is that United has the best fleet, mostly smaller aircraft but American also with almost 900 aircraft, and only about 150 that are wide-body; they could do well. Air Canada and WestJet (the latter in particular) stand to do very well as most international travelers will continue to “avoid the US”. In Europe, things are more fluid and complicated. There the issue is that the vast majority are geared to international long-distance travel, as high speed trains have taken over most 1,000 km city pairs..
In Europe, the biggest carriers are geared toward international travel. That could be a problem. As I said in the introduction, Boeing made a bad gamble on the B737MAX – it was a fundamental error of judgment to build an inherently unstable aircraft platform for a commercial aircraft. There was other corners cut that are now coming out of the aircraft analysis – some are almost worse than the wing problem. Boeing has three aircraft types 777,787 and 737. The narrow body aircraft is almost certain to dominate the next few years as international travelers only slowly return to overseas travel. Airbus also has three types A350, A380, A320 and A220 (boy did Boeing screw the pooch on that last one!). Potentially Airbus could revive the A330…but its more than likely that the task can be taken over the A321 variant.
What would Warren Buffet do
Turns out its an easy one! He would (and did) sell all his stakes in all four US airlines in which he had invested (at losses apparently). As I wrote above there are issues with the airline business -- they are like bleaches...although the price is different the product is the same, therefore clients eventually gravitate to the cheapest provider, those who remain are price indifferent anyway
What would Warren Buffet do
Turns out its an easy one! He would (and did) sell all his stakes in all four US airlines in which he had invested (at losses apparently). As I wrote above there are issues with the airline business -- they are like bleaches...although the price is different the product is the same, therefore clients eventually gravitate to the cheapest provider, those who remain are price indifferent anyway
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