Qantas Airways announces firing of 6,000 employees- Implications for the airline industry

• Impact of Covid-19 on the global airline industry
• Qantas axes 6,000 jobs amid subdued travel demand and chalks out a 3-year recovery plan

Covid-19 has made the airline industry’s worst nightmares come true. The impact of the plummeting demand has been far worse than that of 9/11 and 2008 financial crisis combined. One of the most challenging industries to operate in, the impact of the pandemic was swift wherein the industry not only dealt with sudden drop in demand but also several cancellations, in response to travel advisories as well as social distancing norms called out by governments worldwide. While the major impact of the pandemic impacted operations during March for most airlines, Q2 2020 is also expected to be way more severe. The global airline industry is expected to lose more than US$ 84 bn in addition to seeing their revenues halve in the current year.

                             Source: EQUiBase, Televisory

While we have already seen a few airlines file for bankruptcy protection or shut operations (refer table below), many others are grappling for survival and are employing several measures including significant reduction in their fleet size, closure of unprofitable subsidiaries, layoffs as well as heightened security & health measures in order to gain the trust of their potential flyers.

                                  Source: A4A Research, Televisory Research

After Avianca Airline and LATAM Airlines filed for bankruptcy protection in June this year, just last week Qantas Airlines announced that it planned to slash 6,000 jobs of its 29,000 strong workforce amid falling demand.). The airline is also said to raise US$ 1.3 bn (Australian dollar 1.9 bn) in addition to grounding 100 aircrafts for approx. 12 months. This move comes in complete contrast to its communication in May this year wherein it stated that it had enough liquidity to see it through December 2021. Furthermore, Qantas has cancelled all flights till October post the Australian government’s recent announcement that the country’s borders will remain sealed until next year. The airline has additionally chalked out a recovery plan spanning across 3 years, primarily focusing on cost cuts. Qantas plans to cut A$ 15 bn (~ US$ 10.3 bn) in expenses over 3 years, thereby delivering A$ 1 bn (~US$ 0.7 bn) in annual savings from the year 2023. While the airline sees itself doing well domestically, thanks to Australia faring far better than most countries in containment of the virus, Chief Executive Officer Alan Joyce  while revealing the airline’s recovery plan, stated, “The Qantas Group entered this crisis in a better position than most airlines and we have some of the best prospects for recovery, especially in the domestic market, but it will take years before international flying returns to what it was.”  In line with the aformentioned, the airline’s 6 remaining Boeing 747’s are set to be retired immediately, 6 months prior to original schedule.

While airlines such as Flybe and Avianca which recently shut their operations or filed for bankruptcy protection were already reeling in some form of financial duress, however, the true extent of the Covid-19 pandemic comes to fore when one of the world’s strongest airlines like Qantas needs to step up a drastic overhaul. Most analysts believe the airline industry will return to pre-pandemic growth levels within another 5 years or so. With a growth rate of ~4.1% in 2019 (to touch ~4.5 bn passengers), passenger growth was set to double at that growth rate in 18 years. However, now with the impact of Covid-19, this is likely to go up to 25 years to get to the 9 bn passenger mark. At the moment liquidity will be the name of the game, not just for the airline industry but for most businesses worldwide. Albeit the airline industry has had a good decade in terms of growth, profit margins continued to remain low, in additon to wide disparity in margins between carriers in different regions. While most airlines tend to have enough cash reserves to see them through a few months of fixed costs, the sudden plummeting of demand along with added uncertainity of being able to secure sufficient liquidity to cover current costs is likely to force a few more airlines into bankrutpcy.

Governments will find themselves in a precarious position, with the following possible outcomes:

• Allowing struggling private airlines to fail
• Provide them with some form of liquidity to survive the storm
• Nationalize (similar to the way Alitalia was taken over by the Italian government in March 2020)

While governments in the US and Europe have been more forthcoming in terms of providing bailouts to their carriers, Latin American countries have been relatively more reluctant in providing support to their industries (much like the case of LATAM). In a nutshell, the most obvious take-away from all of this is that we will see most airlines, even the relatively stronger ones, convert into smaller airlines, at least in the short term. So surviving with lower demand will warrant several airlines restructuring and coming out leaner and more competitive in the new-normal post Covid world.