Bankruptcy fears loom large over most airlines

Hakim Hayat

Since the onset of the COVID-19 pandemic, Southeast Asia has been tightening air travel with most countries prohibiting the entry of visitors and its citizens from travelling abroad.

It comes as no surprise that airlines in the region have been seeing massive revenue drops, with a recent report from the International Air Transport Association (IATA) estimating the losses at USD38 billion, a 49 per cent fall in passenger demand from 2019 to 2010 along with a potential loss of 7.2 million jobs.

The report also said the international traffic demand dropped by 65.5 per cent for Asia-Pacific airlines this March compared to the same month in the previous year, the highest drop compared to other regions.

Energy and Transport Economist at the Economic Research Institute for ASEAN and East Asia (ERIA) Alloysius Joko Purwanto, who is based in Jakarta, Indonesia, and Senior Researcher at the European Commission’s Joint Research Centre Panayotis Christidis, who is based in Seville, Spain, said small- and medium-sized airlines in other parts of the world have already filed for bankruptcy due to the pandemic, and these include Flybe in the United Kingdom (UK), Trans State and Compass Airlines in the United States (US) and Virgin Australia.

The CAPA Centre for Aviation in Sydney, Australia has warned that unless governments and the airline industry take coordinated actions by the end of this month, most airlines in the world will be facing bankruptcy soon.

Despite mounting uncertainty, Purwanto and Christidis are cautiously optimistic that global travel demand will bounce back – at least partially – by the second half of the year and the aviation industry will experience some recovery.

Nevertheless, passenger demand could be much lower than forecast, as economic impacts due to the pandemic on ASEAN countries will be significant, they added.

“The lower demand may eliminate smaller operators and less-established routes,” they believed. “While lower demand is economically bad for hub airports and bigger airlines, some smaller point-to-point direct routes may disappear completely under this (pandemic) situation, and instead shift to hubs resulting in the consolidation of bigger hubs and airlines.”

They added, “Some smaller hubs would lose the critical mass to allow efficient transit operations and would be limited to serving mainly point-to-point connections. For ASEAN countries, this consolidation and dispersion would affect both intra-regional and long-distance (intercontinental) air travels.”

The consolidation, they said, may reduce the number of airlines competing in heavy traffic routes such as Kuala Lumpur in Malaysia, Jakarta and Singapore. As for the Philippines and Indonesia that see heavy domestic air travels, the impact could be equally significant as the need to decrease fixed operational costs in the current low-demand period may push low-cost carriers to modify their operations, such as cancelling of lower demand routes or abandoning smaller hub airports.

Meanwhile, Purwanto and Christidis saw a more severe impact on intercontinental air travels in terms of passenger demand, financial loss and recovery time.

While “the drop in intercontinental demand is caused by travel restrictions”, which are mandated by governments, they predicted that “this demand will remain low in the future, mostly due to the badly damaged economic sector”.

One strategy that may address the impact of low demand of ASEAN carriers is the adoption of agreements between ASEAN and other regions, such as the ongoing ASEAN-European Union (EU) Comprehensive Air Transport Agreement (CATA), said Purwanto and Christidis.

The ASEAN-EU CATA will be the first block-to-block agreement at an intercontinental scale and will cover a wide range of gradual regulatory convergence, including market access, safety, security, air traffic management, social, consumer and environmental protection and fair competition.

The agreement, the experts believed, could help ASEAN aviation industry recovery by improving the right to fly between countries (or what is classified as the “5th Freedom”.

For example, ASEAN carriers that fly from Chiang Mai, Thailand to Amsterdam, the Netherlands with a stopover in Paris, France will be allowed to pick up passengers and cargo for the leg between the two European cities – a freedom that does not currently exist. Similarly, EU carriers will be able to fly from Dusseldorf, Germany to Surabay, Indonesia with a stopover in Singapore, Kuala Lumpur or Jakarta.

“The agreement will lift existing restrictions on the current code-sharing agreement between respective states’ carriers, permitting them to code-share freely on trunk routes as well as on each other’s regional and domestic networks,” said Purwanto and Christidis. “This is expected to increase the point-to-point traffic in both ASEAN and EU countries, thus strengthening the position of both regions’ airports, creating additional demand that can help to build the critical mass for new connections, including reopening connections abandoned during the pandemic.”

They also believed that the ASEAN-EU CATA will eliminate market access limitations.

“More ASEAN and EU airlines will be able to enter existing hub-to-hub operations to compete with the current players, such as operators based in Middle East and the Gulf,” they said. “The creation of new joint venture operations should allow competing players on hub-to-hub routes to cooperate and engage in joint marketing and revenue sharing, which can reduce shares of existing dominant players while decreasing average travel costs.”

Both the economist and the researcher cautioned against seeing the entrance of foreign carriers into ASEAN domestic air operations as a loss of sovereignty.

“It is a fast and realistic strategy to help the entire aviation industry recover while sustaininga connectivity within the ASEAN region to maintain the competitiveness of regional production networks and the attractiveness of the region as an investment destination,” they said.