The business rescue industry was abuzz when government announced that South African Airways (SAA) would be placed into business rescue. A year and a half has past and we are nowhere near the finalisation of this rescue. This has placed the process into the spotlight once again as taxpayers (who are bankrolling the process) are raising their voices questioning the delay.
Covid-19 has had a significant impact on the transportation sector with business models forcibly evolving in an attempt to remain relevant. What does the future of air transportation look like?
Flying high
One of the major questions that Covid-19 asked was if there was a need for state owned airlines and if there was a need for airlines that served massive international routes. The biggest example of this is the South African Airways business rescue.
I read the October 2020 edition of You Perfect Practice (the official newsletter of the Turnaround Management Association of Southern Africa) with much interest. In the newsletter, there was an article written by Dr Joachim Vermooten which asked if privatisation could save SAA in the same way that it saved many other global airlines once they became privatised. The article showed that many airlines became profitable after being privatized.
What will be the biggest profitability influencer in a post Covid world? We are all aware of the massive boom in ecommerce which will persist after Covid-19 as consumers change their shopping habits to accommodate this.
Health and safety are major issues in the current paradigm and trump the need to purchase something or to fly to Balito or Camps Bay for a long weekend. This has impacted the airline industry. I recently read an article by the World Economic Forum which points out that there will be a 36% increase in the conversion of passenger aircrafts to freight aircrafts as the value of passenger aircrafts have plummeted since the start of the Pandemic.
Massive demand
The article points out that Aviation analytics firm Cirium expects the number of P2F conversions globally will rise by 36% to 90 planes in 2021, and to 109 planes in 2022.
“We estimate that most slots are sold for 2021 and at least 40% for 2022,” Cirium Head of Market Analysis Chris Seymour said. “There is an increase in newer-generation programs, notably the 737-800 and A321 as well as the A330, although older types like the 767 continue to see strong demand, driven in the past few years by Amazon building their own fleet.”
The article adds that the market value of 15-year-old planes has fallen by 20% to 47% since the start of the year depending on the model, according to advisory firm Ishka, which makes freighter conversions more attractive.
The article points out that Air Canada is looking to convert several of its Boeing Co 767s, Russia’s S7 Group is acquiring its first 737-800 converted freighters from lessor GECAS, and lessor CDB Aviation has ordered two Airbus SE A330 conversions from ST Engineering’s EFW joint venture with Airbus.
A smart business decision
The successful implementation of a turnaround plan is mostly based off the back of a smart business decision that is driven by increased demand.
The article pointed out that Boeing said cargo yields had risen by 40% through September 2020 because of the pandemic-related passenger disruptions. In addition, it forecasts that more than 60% of freighter deliveries over the next 20 years will be conversions rather than new widebody freighters like the 777. Narrowbody freighters are almost all conversions.
The article adds that the conversion boom is also helping aviation maintenance, repair and overhaul groups offset some of the lost business from the decline in passenger flights. Such conversions generally cost millions of dollars on top of the cost of the aircraft and take three to four months, said ST Engineering Aerospace president Jeffrey Lam said.
His company is ramping up capacity, with plans to convert at least 18 A321 planes next year, rising to around 25-30 annually in the future, up from single digits this year. “We are all booked out for 2021 for aircraft conversions,” Lam said. “The first slots are well into 2022.”
The key question here is: can the decision to shift from a passenger focus to a cargo focus be easily made if an airline is state owned?
Slimmer versions
Recent statistics have pointed out that the average person gained 0,5 kg per month that they were in lockdown. Do not expect the same from airlines.
The Pandemic has shown that the future of airlines lies in slimmer, streamlined versions of themselves. The days of massive global routes are riding off into the sunset. This will benefit airlines and countries that have built themselves around being a commuter hub. Emirates Airlines will maintain its position and Dubai will still be a massive transit hub. It will be interesting to see what happens to airlines like Qatar Airways and Cathay Pacific who traditionally fight with Emirates for this demand. Atlanta and New York will be major transit hubs and entry points into the US, South America, and the Caribbean. What will the future of other US airports and airlines be? Will domestic demand be strong enough?
Robin Nicholson is the Director of Corporate-911
