LONDON – Back in January, AviationSource got to speak with the Editor-in-Chief of The Air Current, Jon Ostrower to discuss all things aviation as we take a look at the current and future environment of the industry.
Ostrower is an industry veteran when it comes to writing, with his career spanning over a decade, writing for the likes of FlightGlobal, CNN amongst others.
Here is what he had to say:
JF: Jon, thanks for speaking with AviationSource. To start things off, you did an article recently regarding the demand for business travel. You said until business travelers return, every airline is a low-cost carrier. What is the thrust behind that argument, and do we see this occurring on a long- or short-term basis?
JO: Well, it is certainly on a short-term basis. This analysis came from a person we are working with and have known for ages. Because everyone is trying to keep their head above water, and with business travelers staying at home, and the main customer base is booking for leisure, the nature of the traveler has changed in composition.
I think something like 85% of the passengers that would fly during a year would fly less than four times per year, with the other sliver being business travelers. And those in business traveled at an enormous rate in January. So, they are all high yield travelers. So essentially, we have seen in recent years a segmentation of the cabin, right? You have got business, premium economy, economy, and basic economy. You have got maybe First in that case, but the segments are competing for the lowest possible fare.
So, it is not on schedule. It is based on cost. So, everyone must adapt their model as they attract leisure travelers who do not want to pay to fly, otherwise you would not have had all these fare sales that we have seen. Suddenly all these high yield travelers that used to be in the system would have expense accounts to book such flights. Well, they are not there now.
So inherently the model must adapt to the fact that every seat is effectively a basic economy fare. Yes, you can buy other things with the product, but overall, the model has been forced into a mode of volume and get butts in seats and get people flying. And once you do that, then you have the cash. You can have people moving through the system. It therefore is a race to the bottom and until things such as travel restriction or the pandemic really eases itself, this is how it is going to look.
JF: Where you are based now is home of Boeing, being Seattle. The manufacturer has obviously had quite an intense few years with the likes of the 737 MAX crisis, issues with the 787 and the delay of the 777X. Do you believe Boeing have a path out of this drought that they are experiencing and is so, what do they need to do to achieve this?
JO: That is a book in its own right. Do they have a path out of it? I believe that they do. They are certainly under pressure, having a series of challenges that are very real that have both everything and nothing to do with the pandemic all at the same time. So, you have your internal factors, like as you have said with the 737 MAX and the 777X. That obviously connects to the external side of things as well, such as demand levels. What can airlines take delivery of? Also, with the 777X being entered into commercial service in 2023, that is a four-year delay on the program and will be 10 years from the launch of the program too.
However, Boeing is a big enough company that they can walk and chew gum. But the problem is they are getting 99 and a half percent done on every project. And that is not enough, right? You need to be able to say that we are going to start something, and we are going to finish something.
There is no doubt in my mind that Boeing is still capable of doing extraordinary things. The number of organizations that can design, certify, and then maintain a network of commercial aircraft, military aircraft and even spacecraft are exceptionally low. So, the expertise is solid. Once they think like that, then they know they need to focus on slowing down to speed up. But when it comes to problems with the 777X, the 787 and the MAX, the concern is internal as they are worried about competition with the likes of Airbus as well as overseas with the ascent of the Chinese market too. Fundamentally, they are going to need to look inside themselves and find the answer to this rather than the market telling them how to move forward.
JF: As we have heard throughout this pandemic, the public line is that 2024 is the slated year for full recovery. Some optimists like myself believe that we can achieve this before that time. What are your thoughts on recovery?
JO: I have heard everywhere from 2024 to 2029. I think it is probably somewhere in there. In terms of demand, I think achieving 80% of 2019 demand levels feels like victory, right? But when are hovering around a 80% decline in international traffic growth, that is an insane stat. I mean, it is completely evaporated.
There is never going to be a recovery until we get control of COVID. There is the commercial interest of the aviation business that wants to push forward and there is a government opposition to do so in terms of public health. As we have seen, aviation is a vector for moving people who do not know that they are infected from one part of the world to another part of the world, and therefore we have seen the introduction of new strains etc.
All the cabin cleaning and airport procedures in the world will not fix that. So, there must be a different type of conversation that takes place around recovery. We saw this last summer with a quick sprint, particularly in the U.S of trying to get up running and try to beat. All the airlines dumped capacity onto the market and resulted in everyone falling flat on your face on the other side of it. The harder you spin your wheels, the more stuck in the mud you are. So, until there is a real sort of harmonization between businesses and governments, this path will continue.
I do wonder what the industry looks like on the other side of this, ultimately from the perspective of the product, the network, and the work from home dynamics that we have come to. I mean look, we are having this conversation over Zoom. So ultimately, we are now going to end up back to where we were in 2019. We will go to wherever we were and where the numbers might look similar. But this pandemic has dictated what is going to be a very changed industry for the remainder of the decade and beyond.
JF: So, with that in mind, as we progress throughout this year, 2021, are you saying that the industry is trying to recover too fast, say against the government factors of things such as vaccine distribution etc.?
JO: I do not think they have been given another option. There were a lot of policies that we created last year, particularly in the U.S that kept airlines flying and incentivizing them to keep flying and to hold onto routes. When the CARES Act funding looked like it was going to disappear, they ramped up even more because they made the decision of letting the free market to figure it out.
If there is a public health objective that their governments must limit the number of people who are moving around the world to prevent the spread of COVID, then you need to work with airlines, and essentially you need to incentivize not flying. So, I think what we will realize is that the combination of the economic damage and the public health damage was done in concert with each other by effectively trying to think of them as two separate pieces. Having a public health objective must understand the consequences of that just naturally.
The aviation industry is inherently fragile, and it is subject to so many different forces that are out of its control. With it being still heavily regulated, not regulated with a capital R, just the number of regulations that are required. So, there is not been a successful, integrated approach to essentially whether it is widespread testing or other things that can get us back in the skies. If you let the free-market figure it out, you are going to lose a lot of airlines.
JF: If that is the case, where do you think that will leave manufacturers such as Embraer and ATR due to them not being as predominant as the likes of Boeing and Airbus? Do you think that they will see success over the next few years, or will it be difficult for them?
JO: I think in some respects they are seeing a lot of the same challenges that Boeing and Airbus are experiencing currently. These are factors that run from the A380 down to the ATR42. There are a lot of used airplanes out there and some will be part of a huge retirement wave, meaning there is going to be huge amounts of capacity available in the market. But the airplanes that are parked on the ground need to go somewhere and fly. So, someone is going to own those. But the question is, when you lease them out, how much should that lease be?
So, it ultimately becomes a battle. Even after the 2008 global financial crisis, business jet operators found this challenge difficult as they were competing against their own inventory for new sales. So, will that happen for the commercial sector? Take IndiGo for example. Virtually every airplane they took delivery of was the most taken in 2020 at the heart of the pandemic. So, there is a credit to be given to them to maintain a delivery rate, but also the fact that you then have this other asset, like an older A320ceo coming off lease and being returned. Where does it go from there?
Therefore, the industry is going to be awash with old aircraft. We have seen a lot of smaller operations pop up where older aircraft have come off lease and have headed to other carriers, like Alliance Airlines in Australia with Embraer E190s, as well as in Asia and elsewhere. They are secondhand aircraft. That speaks volumes about the remarkability of the aircraft, but it is going to be challenging when you are talking about the total all-in costs of a new airplane versus an old one.
JF: When you speak about excess capacity, this means that manufacturers must adapt their sales strategies, especially when it comes to airshows. In the past, we have seen airlines bulk order hundreds of aircraft at a time. So, my sort of funny question here is do you think the likes of Farnborough, Dubai, Paris, and Singapore Airshows are going to be the same again?
JO: Not for a while. I credit this joke to a colleague. He would say: “What’s the schedule going to be now? There is an order cancellation at 9am, a deferral at 10:30am and a bankruptcy filing at 3pm”. You know it does not really make sense for that to happen.
The likes of Airbus and Boeing have enormous backlogs, and such sales strategies have nothing to do now because of that. There was way too much ordering taking place. This is not an opinion either.
You look at the historical trends and everyone was double and triple booking. When you look at the numbers of orders that were coming in and the industry was not thinking about any downturn ahead as there was no indication of it showing.
Then it all added up to the point that where once COVID arrived, the vulnerabilities revealed itself. There is always a COVID, there is always a SARS. There always is a global crash. There is always a Gulf War. There is always an oil shock. You just keep going back through history and it repeats itself, so airshows are going to be kind of quiet in the 2020s in that regard, but a lot of the future orders are going to be smaller deals due to the backlog being preserved.
JF: In your work, you touched up on the relations between the U.S and China now. With the likes of COMAC beginning to emerge with the C919 and ARJ21s, do you believe that China can be a threat to the American and European aerospace industry down the line?
JO: I think they will but no until towards the middle of the century. We have got a long way to go before that happens. I think the Chinese expectation is that demand on their side will be limited globally, but the Chinese market can cultivate the volumes. Because of the captive market, you have the airlines whose purchases are highly regulated by governments in combination with their aerospace goals.
I guess the way to look at it is the presence of manufacturers in China. Take Boeing for example, if 20% of their revenue pre-crisis and pre-COVID was coming from China, what if that gets cut in half. If they deliver half as many airplanes to China as before, what does that adaptation look like?
The same thing applies to Airbus as well. China can control itself, but the country is so enormous in the big picture that it will affect its ability to trade as well as how they do business in the rest of the world.
JF: In the U.S, the higher rate of infection that has occurred has caused a lot of emphasis on consumer confidence when it comes to flying and the safety aspect behind it. As an American like yourself, have you flown during the pandemic and would you agree with the style of American Airlines CEO Doug Parker who on LinkedIn, has been flying around the country and encouraging a sentiment of safety during this volatile time?
JO: I have not flown since February 2020. It has been an exceptionally long year; I miss it terribly and I will fly again. I recently tweeted that I am the living personification of pent-up demand. I am ready to go but I am putting my family first before I choose to fly. I do not want to take any unnecessary risks that could let this virus into our life.
No trip anywhere right now tells me that it is worth it. It does not matter. We have Zoom, but eventually we are going to get sick of it. I am sick of Zoom. I like attending events, I love having a coffee with people in person. I love the connection. I love going somewhere. Do I believe it is safe to be on airplane. Yeah, the data certainly tilts that way.
Whilst there have been studies about transmission being low on airplanes, what about the guy who goes on a flight, not knowing he has a virus. It is not the concern just about spreading it to other passengers, but when he disembarks. Who is he going to give it to?
As I have said, transportation is a factor for moving people, which in turn brings infections with it. So, the question again turns to, how do you deal with that? But overall, it is not a risk that I want to take, which could have repercussions for my family.
JF: As you know, it is Southwest Airlines’ 50th anniversary this year. How do you feel they have stood out from the rest over the last five decades?
JO: I have studied them a lot, not just from a reporting perspective, but from an academic one too. They are the tortoise to everyone else’s hare. You can see in their delivery profile, their order profile and in their growth.
By moving slower, more consistently, they can make changes quicker and make those adjustments. I think a combination of being a people-centric organization has given them just the ability to do things that other airlines wish they would be able to do. And look, their model is out there in the public, it is not a secret.
They treat their people well and they know that is what they need to do. They also understand their limitations too. Are you going to be flying Southwest on a trans-Pacific basis? No, you are not.
WestJet tried to adopt that model but ran into a lot of financial trouble because of it. Because Southwest adopted this attitude from day one, it does not lose them money. Their successes culturally have encouraged its success on the economic front. So, I think they have been enormously successful in their stability.
JF: Is there anything else you would like to say to our readers about the industry?
JO: I am an optimist. However, that does not mean that things are not going to be hard. I am optimistic that the industry that comes out the other side is going to reveal a whole new slate of players and winners, which is going to change this industry forever. People need and want to travel and fly again. The systems by which they do that are entirely up for grabs.
We are going to see all these intersecting forces, whether it is climate change, e-commerce, public health, and others, and they are going intersect with each other which will create chaos and disruption. The companies that can find a combination of stability within their own organizations are going to be the ones who will survive due to such perseverance the ability to adapt too.
Businesses rise and fall, and things change. That has been the only consistent thing about anything in life. I think we need to be excited about the change rather than focusing on trying to go back to 2019. The pandemic has been a great accelerator of pointing out the trends that need to be met, meaning things could happen a lot sooner than expected.
I am excited to see what comes from green aviation and how we can travel sustainably, because although we need to pursue to environmental angle, there is an existential need to get out and see the world. If that remains intact, and these forces combine and create an interesting environment, we are going to see new technologies emerge.
The quicker we get there, the better, and that is regardless of climate change. It is good for a lot of different things. So, I am excited and optimistic. I am certainly nervous to see what happens next because people do get hurt. That is the harsh reality behind it. People lose their jobs; businesses collapse and that puts an enormous amount of stress on people. There is going to be a lot of overly exciting advances over the next three, five, 10 years that we will see. The industry will be defined by what happens next. And that is something to look forward to. Definitely.
JF: Jon, thanks so much for speaking to me.