For those who miss flying — and even those weary road warriors who don’t — the sheer magnitude and longevity of the COVID-19 pandemic raises these questions: When will flying return to normal? Will airlines be able to offer all the same flight options they did before the pandemic? What about airfares?
Despite the current unknowns, air travel remains an indispensable service. The airline industry will survive and once again thrive. It has proven to be resilient in previous downturns and in each instance, has come back stronger.
It’s hard to feel so sanguine after last year, however. Throughout 2020, airlines slashed their global in-service fleet. By the end of the year, capacity had fallen to 2012 levels — 18,200 aircraft — amid sharply lower travel demand. In addition, the major aircraft manufacturers reduced the production of their most popular models by as much as 30%. Many aircraft that were parked have been or are expected to be retired, while the availability of new aircraft has fallen because production rates were cut drastically.
And yet … A recovery is coming. Vaccines are rolling out globally and pent-up demand is building. While current estimates for recovery back to 2019 traffic levels range from 24 to 36 months, the new vaccines may prompt an earlier turnaround — about 18 to 24 months. As a sign of optimism, the capital markets have opened back up to the industry – airlines are issuing securities that are widely oversubscribed.
The rebound, especially the pace of recovery, poses risks for airlines, but also many opportunities. While there are operational challenges to restoring services, there are ways some airlines can improve their competitive positions. They’ll need to redesign their routes, find smart and cost-effective ways to restore flights, all the while factoring in the impact of numerous airline bankruptcies.
The winners will be those that do the best job of giving passengers what they want — frequent nonstop flights to where they want to go at low prices — while also maintaining the most cost-efficient operations with the safest equipment. That’s no easy task as many airlines parked or retired scores of aircraft while also delaying or canceling new aircraft orders as they wait out this crisis. How will they overcome the myriad changes and come back even stronger?
Just-In-Time Aircraft
Enter aircraft leasing companies. Industry outsiders are usually surprised to learn that the world’s airlines lease nearly 50% of the aircraft that they fly. With the drastic COVID-19-induced changes to airline fleets, carriers will need aircraft leasing to get planes back in the skies to support the return of passengers en masse.
Now that airlines have parked equipment and cancelled orders, airline leasing companies have the equipment that can support increased demand in a matter of weeks or months — not years.
They bridge the gap between carriers that need to reduce their fleets with those who need to increase them. And should the recovery accelerate, strong relationships with aircraft lessors will be at a premium as airlines seek to backfill capacity they no longer have after months of stagnation and cancelled flights. Ultimately, passengers are the beneficiary.
Putting Aircraft Back In Service
But what about those thousands of grounded planes already owned by airlines? If an aircraft has been parked since March 2020, that equipment may need maintenance, repair or replacement before being put back into service. To get it back into the air relatively quickly, and keep costs low, fleet managers will again turn to lessors.
Lessors not only provide access to planes. They also give airlines access to crucial aircraft parts, most notably engines. This means fleet managers can avoid incurring the large cost and time of maintenance and repairs required by grounded aircraft after their 2020 stints in the desert or unused runways. Parking a plane can cost as much as $1,000 per day, and that doesn’t include other expenses such as maintenance and insurance.
Airlines can cut costs further by purchasing used but fully functional equipment from their leasing partners, with no impact on safety. Or they can raise capital by selling off their retired aircraft to lessors who scavenge key parts and give them second lives through aftermarket sales or leases.
This aircraft leasing business model keeps planes in the air, offers another layer of industry efficiency and helps optimize airline operations — all of which are great for passengers.
Back to normal At the start of the COVID-19 pandemic, airlines cut their flying drastically. Going back to normal means that airlines must rebuild their operations quickly to meet returning demand. Aircraft leasing companies are an essential part of this recovery.
While a family going on their first destination vacation in more than a year may not realize it, the plane they board, the engines that power it, even the seats they sit upon, may have been provided by an aircraft leasing company that is working hard behind the scenes to put planes in the air — safely.
Mark Perez is a founding partner of Virgo Investment Group and board member for Zephyrus Aviation Capital.
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