The giants of the airline industry may have a new business mantra: Smaller is better.
First to make the move explicit: Lufthansa, which has reduced its fleet size by around a tenth and shuttered one of its low-cost subsidiaries, Germanwings. The moves, announced Tuesday, were prompted by the coronavirus crisis—but their effects may last way beyond it.
“It will take months until the global travel restrictions are completely lifted and years until the worldwide demand for air travel returns to pre-crisis levels,” Lufthansa said in a statement. “Based on this evaluation, today the Executive Board has decided on extensive measures to reduce the capacity of flight operations and administration long term.”
Expect to see more of this.
According to Michael Santo, head of aviation at the German management consultancy h&z, this smaller-is-better mentality will pervade in the industry “for at least the next five years”—and for the giants of the industry, that may have an upside.
Lower overheads
“The industry is realizing that size and complexity is something they can now get rid of. It’s probably a topic they all have to consider whether there is a corona crisis or not,” Santo said Wednesday. “The overhead and administration cost for a conventional or legacy airline is far too high for most of these airlines. Especially compared to low-cost airlines, a big portion of the margin is going into that. It works when the oil price is down, but as soon as the oil price increases, you don’t have the margin left to finance these huge administrative overheads.”
The Lufthansa group currently has 700 of its 763 planes sitting idle, due to the coronavirus travel restrictions. But even before the Covid-19 pandemic struck, it had already been planning to restructure its various brands into one operational unit—now that process is just being “accelerated”, while existing restructuring programs at its Austrian Airlines and Brussels Airlines subsidiaries are being “further intensified” with fleet reductions.
Eurowings, Lufthansa’s surviving budget brand, will shed 10 Airbus A320s (the Germanwings brand was folded into Eurowings some five years ago, but Germanwings-registered planes continued to operate some Eurowings routes until this week.) The regional carrier Lufthansa Cityline will lose three Airbus A340-300s.
At Lufthansa itself, 18 planes are being permanently decommissioned: six Airbus A380s, seven A340-600s, and five Boeing 747-400s. Lufthansa had already planned to sell the A380s back to Airbus a couple years from now, while the others are being retired “based on the environmental as well as economic disadvantages of these aircraft types,” the group said.
Order issues
Lufthansa-owned Swiss International Air Lines will also see a fleet-size reduction, but that will come at least partly through the delaying of new plane orders.
Stelios Haji-Ioannou, the founder of and largest shareholder in easyJet, wants to see similar action taken at that carrier.
EasyJet has a $5.6 billion order in for 107 Airbus planes, and Haji-Ioannou is desperately trying to get it cancelled. On Wednesday he swore to “personally sue” the airline’s management if the order goes through, but he had already set out his reasoning in an open letter at the start of the week. The letter warned that easyJet would “run out of money around August 2020, perhaps even earlier” if the deal is maintained, because it is “wildly optimistic” to assume that air travel will bounce back during the summer.
“Fear has now taken over human behavior when it comes to any form of foreign travel,” Haji-Ioannou wrote. “Each country will want to keep others out for much longer than the date that their own local national lockdown ends. I think that easyJet at the end of national lockdowns will feel more like a start-up trying to find a few profitable routes for a few aircraft at a time.”
Slimming down
These are not the first signs of airlines heading for a more slimmed-down future. In late March, the travel website The Points Guy reported that Delta chief financial officer Paul Jacobson had told employees the U.S. carrier was “going to be smaller coming out of” the coronavirus crisis. And multiple reports suggested Alitalia’s fleet would be a quarter of its current size when the Italian government relaunches it post-nationalization.
John Strickland, the director of independent air transport consultancy JLS, said Wednesday that the aviation industry was likely to have less capacity for quite some time, due to a combination of fleet reductions, consolidation and the “out and out failures” of some airlines.
Strickland noted that some airlines might choose to “keep operating a similar number of flights but with smaller aircraft”—a strategy that may allow them to maintain their valuable slots at major hubs while cutting operational expenditure. However, that won’t always be possible. Lufthansa, for example, said in its Tuesday statement that its downsizing would reduce its capacity at the crucial Frankfurt and Munich hubs.
Notably, Airbus said Wednesday that it was slashing production by a third “to adapt to the new coronavirus market environment.”
In a separate statement to that of its parent, Lufthansa’s Austrian Airlines said Tuesday that it expected demand this summer to be somewhere between a quarter and half of that a year ago, and a “pre-corona level” of demand wouldn’t arrive until “2023 at the earliest”.
“The world we will be flying into will be a different one,” said Austrian Airlines CEO Alexis von Hoensbroech. “People will travel again, but the economy, tourism and passenger needs will have changed after the Corona crisis. We will align our company to master this challenge.”
“The current shutdown is not a ‘goodbye’ but a ‘see you later’.”
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