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IAG job loss announcements rock the travel sector

CMC Markets

Even without the sudden shutdown of the travel industry in the last month, the last two years have been a struggle for airlines and the wider sector, with multiple businesses failing, including Monarch, Thomas Cook, and more recently FlyBe.

Apart from problems with overcapacity, the industry has had to contend with two high profile crashes of the Boeing 737 MAX, which caused that plane to be grounded indefinitely and increased the costs of a number of the airlines who used the plane, and had to lease replacement aircraft to fill the gap

Having grounded planes and furloughed staff in the face of the Covid-19 tsunami coming their way the industry is now set for another change and challenge.

Even before last night’s announcement from British Airways owner IAG, the challenge for the industry as we look ahead to a post-Covid-19 world, is how recent events would affect thousands of jobs, as consumers hold back and change their behaviour in the wake of this crisis. This appears to be something that IAG has decided to get in front of after the company announced that its British Airways division could see up to 12,000 jobs disappear in the months ahead.

Yesterday evening the company announced a record quarterly loss of €535m, after revenues dropped 13% to €4.6bn, with most of that impact coming from its long-haul business. The company also took a €1.3bn charge on fuel hedges, and with passenger numbers falling 94% in April and May, the drop in revenues is expected to be something that is likely to continue for some time to come.

Business travel, which a lot of national carriers rely on, is also likely to see a big drop off as companies realise that lots of meetings can take place just as easily on Zoom and other remote conferencing facilities, a trend that could also have significant consequences for the hotel sector.

While European and US airlines appear to be going down the state-funded bailouts route, this merely delays some tough decisions and that’s before you even consider travel companies like TUI Travel, and those businesses that sell package holidays.

US airlines like American Airlines, United Continental, and Delta have all been in receipt of a state-funded bailout by the US taxpayer to the tune of $25bn, while European airlines appear to be following suit with France and the Netherlands set to pledge up to €11bn for Air France KLM, while German rival Deutsche Lufthansa is in discussions with the German government over a multibillion-euro bailout of its own to the tune of €10bn of loans and credit guarantees.

While one could accuse IAG of some cynicism in the timing of its announcement, and it has been one of the few airlines not to go down the bailout route, there appears no escaping the reality that the aviation and travel sector is likely to take several years to return to any sense of normality. It is highly unlikely that normal service could be resumed at a time when social distancing is likely to be with us for some time in the absence of a vaccine. It is also highly unlikely that airlines are going to require the same number of aircraft or staff to run their fleets. More immediately, airlines are likely to face an enormous challenge getting people back on board their aircraft until consumer confidence has returned.

Easyjet CEO Johan Lundgren was rightly ridiculed by Ryanair CEO Michael O’Leary for suggesting that the middle seat could be left vacant as part of a return to normal, given that passengers would still be breathing the same recycled air in the cabin, and that the distance between the window seat and aisle seat is less than a metre. That’s even before you consider the distance between the person in the rows in front and behind you, which is probably smaller, than the gap between the window and aisle seats.   

Governments can throw as much cash as they like at their national carriers, however it also needs to be done in the knowledge, that some of these loans may well never be repaid, and that job losses are likely to happen anyway to ensure that the airline remains viable, unless governments intend to renationalise then completely.

One thing seems certain, while last night’s actions by IAG have attracted some significant criticism in terms of their timing, they also point to the challenges facing the travel sector. Will demand have picked up again, and if not, will airlines have to reconfigure cabins so that passengers aren’t crammed in on top of each other? Will air fares become more expensive, as a result of lower capacity, and will package holidays be less popular as a result?

In essence, while governments have gone some way to keeping airlines afloat in the short term, the actions of IAG yesterday have signposted a direction of travel for an industry that is likely to be quite a bit smaller by year end, than it is now.

 

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