An aviation veteran explains how every aspect of air travel— from the size of the plane to the number of possible destinations—could be smaller at the other end of the pandemic

Luckbox sat down with aviation expert William S. Swelbar to get his take on how the industry is responding to the ravages of the COVID-19 pandemic and what role funding from the Coronavirus Aid, Relief and Economic Security Act—or CARES Act as it’s commonly known—is playing in the sector’s recovery. His responses follow.

What’s ahead for the airline industry?

I’ve been doing a lot of modeling and it’s clear as mud. We need to appreciate that it’s going be different and that we don’t have all the answers yet.

All we know is that it will be a smaller industry and changes are afoot. When we come out on the other end of this, there’ll be fewer people per flight and we will have fewer destinations. Hubs will not be accommodating the same level of traffic anytime soon.

When might air travel recover?

It might take four years. In the meantime, United is seeing traffic to its website looking for travel in 2021, and other carriers are seeing people searching in August and the holiday period of 2020. 

How are airlines responding to the pressure?

Many of the carriers just don’t see demand bouncing back like we have seen in the past. So they’re making fleet decisions they haven’t made in in prior downturns. They’re going to be parking airplanes of various fleet types going forward.

Will some cities lose their airports?

Trouble always impacts the small communities first, and the carriers are making decisions to park their smaller jets. Those are the jets that are right-sized to serve many small communities. So I do believe that there will be fewer dots on the map tomorrow.

The highway will become the first access point to the air transportation system for many. They’ll be driving to an airport that’s a little farther away but has more service options and more price options.

Some of the airports vacated from commercial service will need to figure out how to repurpose themselves. It might mean you get more general aviation traffic. I don’t have the answer on that. 

What fate awaits the newsstands, bars, restaurants and shops in airports?

The vendors and the concessionaires will struggle at first but win out later. People will have more dwell time in the concourse as planes are cleaned to fight the virus and because connecting flights are cut back. They’ll be more than willing to sit down and have a hamburger and a beer. 

Is the industry working harder to keep planes clean?

The airlines and the airports will be much more judicious in cleaning airplanes between flights. Not that they didn’t clean them before, but it will take on a whole new level.

Will inflight meals disappear?

Food and beverage service will not be what you’ve come to know. 

What about masks?

Virtually every airline now requires masks on each of the passengers and crew. How long will it last? That’s anybody’s guess, but when we get back to flying the whole experience is going to be different. 

Will carriers continue to keep the middle seat open?

It’s been very carrier-specific but in this industry once one does it another one’s probably going to do it. The middle seat is going to have to stay blocked for some time, but that doesn’t mean that they’re going to do it forever. It’s not perfect physical distancing by the definition we’ve come to embrace the last couple of months, but it’s certainly a help.

Can the airlines operate indefinitely with the middle seat open?

Absolutely not. Losing the middle seat means a capacity reduction of up to 30%. Filling seats  is very important, especially to the ultra-low-cost carriers. This is survival of the balance sheet, and the industry has to get to a point where they are cash positive—not profitable but cash positive.

Cash positive means covering core expenses. It would exclude depreciation and amortization. They have very expensive airplanes, so there’s a lot of depreciation and amortization, and just being cash-positive certainly doesn’t cover all of the financial costs.

What percentage of the seats does an airline have to fill to break even?

It is very much a function of the fare you charge. But let’s call it breakeven if 70% of the seats are full. If not, you’re underwater. What’s important is to get planes back in the air, and as the customer gets more comfortable then fares will start to work their way back up. 

How can the industry make customers feel comfortable again?

We need to win back the confidence of the consumer by showing that it is safe from a health perspective to fly. I’m a big believer in consumer confidence as the key to the success of the airline industry. The airlines sell safety, but this is a different safe and healthy than we’ve dealt with in the past.

Could taking temperatures at the gate and wearing masks in the terminals and onboard help inspire confidence? 

Yes, it’s a beginning. There’s going to be some experimentation along the way, but masks and temperature monitoring are among the first forays into helping people become comfortable that they’re not within the close proximity to somebody who might have the virus.

It will slow the boarding process and make airlines less efficient, so therefore we’ll be flying less. Passengers may not appreciate becoming part of a MASH unit when they get to the airport.

Taking the longer view, many regarded air travel as a luxury in the ‘60s. Will that become the case again?

I’ve spent way too much time thinking about this. What we’re going to see is more segmentation of travel. There are going to be challenges across the spectrum of carriers.

American, Delta and United are going to be looking for what I hate to call the 1960s passenger, but definitely the less-elastic price business passenger. Those are the first to get cut and among the last to come back, so this is going to be a real challenge for them. When that high-yield revenue might return is going to be a function of the economy. It’s also about going back to conventions and all of us not getting too used to Zoom meetings as a replacement for air travel.

Southwest, Alaska and JetBlue will be looking for that hybrid passenger—a combination of business and leisure travelers. The ultra-low-cost guys are going to be primarily focused on leisure destinations and offering lower fares than you might get on the network or the hybrid carriers. Seat density is very important to the those carriers, and seat density absolutely runs contrary to physical distancing.

CARES Act funding doesn’t cover the full cost of airline payroll, but its caveats prohibit layoffs and force carriers to fly empty planes. The industry might have been better off without federal financial support.

In other words, the airlines will focus more narrowly on their established customer bases?

Yes. That’s because it’s going to get more expensive to fly. I don’t think there’s any question about that. This industry has a tremendous investment in mobile assets. It has a tremendous investment in fixed assets at airports with gates and the like. 

And tomorrow they’re  going to be using those assets less efficiently than they did pre-pandemic. That means labor is less efficient and there are not as many seats in the air. Demand will result in increased fares, and that’s how they’re going to generate the revenue going forward.

Will any airlines disappear because of the virus and downturn?

I’m not going to be surprised if we lose somebody along the way. I don’t know if it’s a big network carrier or small one. I also would not be surprised if we see some consolidation activity take place. Think back to where we were in the 2000s when oil went to $147 a barrel. People realized that their balance sheet as individual carriers was not going to withstand this.

So one of the catalysts to carriers consolidating was combining balance sheets, which made for a much better and much stronger company. Consolidation brought the ability to employ more people than they could individually. So, Northwest joined hands with Delta. Continental joined hands with United. American merged with U.S. Airways.

So consolidation has an upside?

Quite honestly, if we hadn’t gone through the consolidation that we went through between 2008 and 2012, I would say that we would have a bankrupt industry today. The case made before the regulators in that period was that we’re stronger together than individually, meaning that a combined balance sheet has a better possibility of weathering the storm than one balance sheet. 

I’m not convinced that the large network carriers are going to look to consolidate, and I’m not so sure that the regulators would have an appetite for carriers that big to join hands. So that takes American, Delta, United and Southwest out of the discussion right there.

There’s been a lot of speculation in the industry that Frontier and Spirit might join hands. JetBlue was certainly interested in Virgin America and was bidding very aggressively for it until Alaska bought it. There are some combinations down there in the bottom six smallest airlines where you potentially could make a case that consolidating bolsters the balance sheet and makes for a better competitor against the Big Four. 

So, predictably, larger carriers have the best chance of staying alive. Has CARES Act funding from the federal government aided or impaired the quest for survival?

Both. It was money to help keep people on the payroll through Sept. 30 of 2020. But it required that if you served a city every day, you needed to keep providing at least one flight a day to that destination. As a result, airplanes are flying empty every day in order to meet requirements of the government grant money.

So the industry is burning significant cash. Maybe 17% of the seats are full, and that’s hardly a prescription for profitability. CARES just buys time to think about how they might be able to maintain as many jobs as possible. It’s a Band-Aid to get from here to there.

Under the CARES Act there was at least some government attachment as part of those grants. And there is also some reach for equity in terms of the loan portion of the CARES Act. But all of that really just goes through Sept. 30 of this year. 

Then the government could wind up owning part of an airline?

I don’t think the government really wants to be in the airline business. But Congress should appreciate just how important commercial aviation is. It drives over a trillion dollars a year in economic activity. It facilitates the movement of people and goods. It’s a vital industry.

That’s why the airline industry got help after 9-11 and day after day after this pandemic struck. If you lose the infrastructure, you can’t rebuild it anytime soon. And I think that’s why people are willing to step up quickly with help. 

Could the CARES Act be costing airlines money?

The CARES Act money that the carriers received to meet payroll was based on payroll in the second and third quarters of 2019. But the payroll in 2020 was bigger, so the CARES Act probably only meets 75% of the true cost. But you can’t lay off anybody until Oct. 1, So, once again, they’re burning cash.

Does that mean that carriers might have been better off turning down CARES Act funding?

They had to think about when the traditional lending windows might close. People were in the unknown and had to bolster liquidity. That outweighed anything else. They were thinking they could possibly try to build some cash generation in the months of August and September.

Will the airlines lay off workers when the CARES Act mandate ends on Oct. 1?

Yes, absolutely. Right now, what the carriers have been good at is getting some voluntary furloughs. People might want to take the summer off—that kind of thing.

     But come Oct. 1, we’re going to have a significant number of layoffs and some of it will be involuntary.

So there’s going to have to be negotiation between the unions and the carriers over the coming months about ways to ease this. People are going to have to be creative and accept the fact that the industry’s going to be smaller.

It’s a hard reality for carriers that have taken a lot of pride in creating good-paying jobs over the last decade. And they’ll have to give some of that back.

Did the CARES Act affect airports?

Airports got their own CARES Act. They got $10 billion, and that was distributed in a controversial way. There’s some clawback going on because some small airports out there got more money than a bigger airport. For that smaller airport, it could cover their operating expenses through 2070. That’s not where we should have distributed the money.

Will that funding keep airports from cordoning off unused concourses? 

I’m of the view that if an airport was a hot spot pre-pandemic, it’s going to be one post-pandemic. We were infrastructure-constrained in a number of airports pre-pandemic, and while demand may not bounce back immediately, it will ultimately get there.

So I hope that in places where infrastructure projects have been financed that they carry forward and get those done. Where we pour concrete today is going to prove very, very important tomorrow. And there’s some discussion that the airports might want to go back for a second $10 billion.

While the industry is lobbying for those funds, could it also seek regulatory changes?

What the industry would like in the immediate term is trust immunity to get around that requirement under the CARES Act where you have to fly a route with an empty airplane. If there’s another carrier flying that route, maybe they could consolidate traffic in the immediate term.

Say that Airline A and Airline B are both scheduled to fly. They’d just put everybody on B. So maybe A flies on Monday, Wednesday and Friday, and B flies on Tuesday, Thursday and Saturday. In effect, you’re sharing the cost. You would be burning less cash because you would be consolidating traffic on the airplane. 

Will Congress or regulators demand that airlines take certain actions?

Congress loves to regulate the airline industry. People on The Hill think they can run the airline business better than the executives do. So they write some laws that don’t necessarily work commercially. 

We’re in this period where people aren’t necessarily willing to say you have to take the temperature at the gate. We can’t test at the gate because we don’t have enough tests. Are we going to be forced to have that MASH unit at Gate 35? It’s likely that could happen. 

We’ve talked a lot about America. What’s happening abroad?

The story that I’m watching closely is Lufthansa, and my favorite headline this week said that in less than 65 days the airline returned to the traffic levels of 65 years ago. Lufthansa is 100% publicly traded, and they’re talking about a $9 billion dollar bailout from the government of Germany in return for a 25% stake. It’s going to be really interesting to see where this goes. 

The big guys in Europe are publicly owned—you know, British Airways and KLM—but they’re all talking to their governments about an equity stake. This would definitely be a step backward. 

The question is going to be what happens with the social programs that cover their employees and make those airlines less efficient than many other airlines around the world. Are those programs going to remain intact so they really can’t do the type of restructuring that needs to be done? That is going to be part of the negotiations, and it’s just too early to tell.

What else should we be saying about air travel?

The first two hours of my day are spent reading and trying to figure out what changed from yesterday. That’s going to continue for some time, but this period between now and Sept. 30 is very important. Not that I think we’ll get a clear view of what everything is going to look like, but we’re going to get a clear view of how people are taking their airlines forward. 

Hawaiian Airlines planes sit idle at the Daniel K. Inouye International Airport in Honolulu.

Airborne Hierarchy

America’s commercial airlines fall into three overlapping categories, according to William Swelbar. He classifies them as big networks, ultra-low-fare carriers or something in between.

The networks reside at the top of the hierarchy by virtue of their size, maturity and wealth of connecting flights. Everybody agrees the classification includes Delta Air Lines (DAL), United Airlines (UAL) and American Airlines (AAL), and many would add Southwest. Airlines (LUV). Together those four controlled 80% of the pre-pandemic market.

Southwest deserves a place at the top because it has grown from a point-to-point carrier to one that connects traffic. It has begun using wider-distribution websites for ticketing instead of relying just on its own site.

Other airlines that probably qualify for top-tier network status are Alaska Airlines (ALK), Hawaiian Airlines (HA) and JetBlue Airways (JBLU).

Alaska has achieved maturity, operates big hubs in Seattle and Portland, Ore., and maintains a strong presence up and down the West Coast. 

Unlike most of the networks, Hawaiian remains a destination airline to some degree but still deserves network status because of its 90-year history.

JetBlue may have earned a place among the big guys but remains a hybrid that mingles qualities of the network carriers with attributes of the ultra-low-fare airlines. The carrier has earned “a very strong customer following,” observers note.

Ultra-low-cost carriers include Allegiant Air (AGLT), Frontier Airlines (FRNT), Spirit Airlines (SAVE) and privately held Sun Country Airlines. They have a lower cost structure than the networks and base their business model on filling lots of seats at relatively low fares.