The unprecedented financial stress brought on by CV-19 hasn’t discriminated – commercial airlines and the private aviation sector are both facing it, and probably will be for some time. Barring a major government bailout, the “last men standing” may not be standing by themselves. Mergers, acquisitions, restructuring, bankruptcies, they’re more than just buzzwords right now.
According to the IATA (International Air Transport Association), global flights are down 47% which has led to revenue losses of approximately $419B and net losses of $84.3B (so far). For 2020, this means that airlines have had no more than three months to cover their annual cash outflows for the year. And 2021 isn’t looking the best right now.
While executives are trying to cut everything in sight, there’s no plugging the hole the size of the titanic – 2021 is going to be a rough year for anything and everything travel related.
Gary Kelly, CEO of Southwest Airlines Co (NYSE:LUV), recently told a reporter of the Dallas Morning News that business would need to double in order to reach cash breakeven. It makes it challenging to stay optimistic about the sector, but many are still trying.
Although the fundamentals of the airline industry may seem dire, it’s nothing we haven’t seen before. Maybe Michael Porter was right: the airline industry is the poster child for the world’s worst business since the beginning of time. They even seduced Warren Buffett who unloaded his airline stocks at a loss. But that’s ok, not every investment is a winner right out of the gate. Certain things take time to come to fruition.
Will travel volumes ever recover and reach their pre-coved levels?
Everything we’ve discussed in previous posts lead us to believe that they won’t recover anytime soon. There’s no doubt that the airline industry is going to experience a permanent shift as a result of the current pandemic.
Airlines business models are based on the very specific ability of maximizing revenues for every seat sold, and every mile flown. Airlines have no choice but to manage the mix of high- and low-paying fare passengers, and to ensure they’ve properly planned their flights to optimize every component of their fixed costs.
Variable costs are another story, but that’s not why we’re here. Could Real Estate potentially become the biggest benefactor from the decrease in travel – barring a systematic government bailout of course. With a very high proportion of office workers logging in from home, the square footage of the average home (which already saw an increase from the past generation to this one), may once again move higher. Offices space could suffer in the short run, but what I am willing to bet on, is that companies will try and maximize their bottom lines by cutting costs. And why not? It’s a benefit to employees as well.
Social interaction may also have to shift from face-to-face to face-to-screen-to-face, but that will only work for some people, and will be temporary for others. In the very long run, I expect office workers to share space on the days they are in the office. Maybe once a week, maybe twice. It depends on the company and the position.
For those who want to continue flying across the country to meet with new and existing clients, it’s going to become the exception. It’s going to say “you mean a lot to us, so I’m here to meet you in person” as travel takes up a lot of resources. Again, certain things just take time. The tortoise won the race, and so will we. By practicing patience and making smart, long-term decisions.
I want to hear what you have to say. Add your thoughts to the comments and let’s keep this conversation going.
– For Real Estate Trends, I’m Moses Gross.