With signs that the economy is recovering faster than expected, did airlines overreact to the coronavirus crisis?
Initially, Perhaps the Airlines Were Too Slow
It was hard to gauge how isolated or expansive the coronavirus would be when initial spreads began. The world has never responded in such a manner and airlines were caught off guard. Even as they slashed schedules by 90%, load factors remained at a fraction of capacity.
Aircraft continued to move around the world with few passengers even as hours were slashed for employees. Financing deals did not come quick enough, but this is all very clear in hindsight.
Aircraft Retirements, Staff Furloughs Cut Deep
When the airlines saw the severity of the situation, the changes they made were drastic and severe. Staff furloughs that appear to be long term involve as many as 30% of airline employees. American Airlines expedited the retirement of 757, 767, A330-300s, E-190s, and some 737 aircraft. Delta retired 777-200s that they just put $100MM into refurbishing last year.
The long-lasting changes will reshape the fleet of carriers that were previously close to capacity. Some of the furloughed staff may come back, some will not. The same is true of aircraft that have been parked.
A V-Shaped Economic Recovery Looks Likely
Some economists now believe that a V-shaped recovery looks likely. This week, fewer unemployment claims were made than expected. The Dow Jones Industrial Average (a marker for publicly traded companies) hit an all-time high the week of Valentine’s Day (Feb 14th, 2020) at 29,398.08. It reached a three-and-a-half-year low close the week of March 20th at 19,173.98 or a drop of more than 34%.
On Friday, June 5th, 2020 the DJI closed at 27,076.79 or just 7.9% lower than the all-time high. The US economy, prior to COVID-19’s expansion domestically and across the globe, was running at the most efficient levels in recent history, unemployment was at 50-year lows among other metrics.
It’s worth noting that this type of recovery was what the American people, lawmakers, and businesses wanted. It’s the exact reason why a $2.2 trillion relief package was put in place at the expense of the US taxpayer. A V-shaped recovery was always the plan.
Did Airlines Overreact?
If the economy, in fact, recovers in a V-shape (sharp drop, sharp incline) airlines could be caught off-guard. While American’s 767s and 757s were slated to go away relatively soon anyway, the Delta 777-200 retirement seems like an overreaction. Delta’s retirement of the MD-88s and MD-90s may have been overdue from a customer perspective but those aircraft were also the workhorse of the airline from mid-sized cities to hub bases but if recovery is incredibly strong, not only will the airlines return to near full capacity but they will do it with dramatically fewer aircraft.
Cynics of the airline business may see staff furloughs during these unprecedented times as a way to justifiably remove more expensive employees from the payroll and when hiring returns, save money on new hires.
Some of the decisions made in the wake of the coronavirus crisis made sense. To honor their contractual commitments, carriers had to fly empty planes on routes for a time. They had to find ways to trim up the carrier and it still remains unknown just how the recovery will go. However, it feels as though airlines may have swerved too far to the correction side given the limited nature of the shutdown and I wonder what consequences this may have for flyers, businesses, and carriers alike. If a carrier can’t scale with demand, will United flyers become Delta flyers? Will fares skyrocket? Will new carriers arise by picking up cheap second-hand equipment and furloughed employees to fill the gaps left by the behemoths?
What do you think? Did airlines overreact? Do you think any of the long-lasting changes were opportunistic or good decisions in a tough environment?