Economic Crisis and the Aviation Industry
The word crisis means being at a crossroads. If we have some sort of economic crisis, it means that we are at a crossroads in decision making. In essence, having an economic crisis means that actions need to be taken either on the national level or at the market levels to get particular outcomes.
While an economic crisis could be a simple slump in economic activities across the country, a total collapse of various segments of the economy, or even a collapse of the entire economy itself. While this article will touch on these topics it’s necessary to note; we are not predicting a collapse or discussing market collapse themselves, but how we can deal with an economic crisis as it relates to the aviation industry and its related segments.
- An economic crisis is not essentially an entire collapse of the economy. As we are foreseeing a changing economic condition, it’s necessary to consider a potential economic downturn as a crossroads in decision making. Economic crisis’s have been observed to occur periodically, and the outcome are typically the same
- An economic down-turn would have wide reaching effects within all aspects of the industry; primarily with airlines, private charter sectors, and flight training facilities.
- The industry may respond and prepare in many ways. While the perspective of higher inflation and cost of borrowing are to be considered for their negative impacts, pilots and businesses must look to the ways that can leverage their capabilities and ensure their prosperity during this time.
What would it mean for us to have an economic crisis – downturn?
A U.S. economic crisis is a severe and sudden upset in any part of the economy. It could be a stock market crash, a spike in inflation or unemployment, or a series of bank failures. They have severe effects even though they don’t always lead to a recession.The United States seems to have an economic crisis every 10 years or so. They are difficult to eradicate because their causes are different. But the results are always the same. high unemployment, near-financial institution collapse, and an economic contraction. These are all symptoms of a recession. But a financial crisis doesn’t have to lead to a recession if it’s addressed in time.
Overall economic market conditions: Inflation raises prices, lowering your purchasing power.Inflation also lowers the values of pensions, savings, Treasury notes, and other forms of fixed income. Assets such as real estate, precious metals, and collectibles usually keep up with inflation. Variable interest rates on loans increase during inflation. Inflation tracks the rise in the price of goods and services, which in turn shrinks the dollar’s purchasing power. When inflation rises, consumers can purchase fewer goods, input prices go up, and revenues and profits go down. As a result, the economy slows down until stability returns.
Concerns for the Aviation Industry: Just like how the economy seems to have some sort of economic crisis periodically, so has the aviation industry. And in the same way that the outcome is the same regardless of why they came about, is true for crises in the aviation industry. From The Gulf War, the 1990s economic crises, 9/11, the aviation industry has been no stranger to being at a crossroads. Especially with the environment that is a result of the COVID-19 Pandemic, the state of the economy could bring yet another set of special circumstances for all aspects of the aviation industry to be affected by. For more on this see chapters 4 and 5 of our mini-book, “Aviation – From Instability To Disaster” Airlines are due to be one of the most affected areas of the aviation industry, while the private sector has to the potentiality to benefit, and flight school sectors are bracing for the higher cost of borrowing.
How would an economic downturn affect the airline segment?
Airlines have unfortunately dealt with a myriad of obstacles in recent times. While this can be viewed negatively, the fact that this segment of the industry has been faced with extended issues means they are better capable of problem-solving and have seen more situations in the past to make a good strategy to deal with such problems. An economic down-turn would no doubt affect airlines, some of the key variables to be aware of are as follows
Profit margins will remain low: On a consumer level, aviation will be impacted by passengers facing rising prices for airline fares. This may dampen demand and temper the recovery of the sector from the pandemic. As the industry as a whole is trying to get back to whatever normal is, corporations are looking out for the relief government aid may bring. However, it is typically a long waiting process that airlines will have to wait out to see the potentially positive impact that government assistance may provide. While restrictions from the pandemic are easing up, passengers are being faced with higher airfare prices which may make them consider other options or not travel at all.
Pilot shortages will remain and may even increase: There is no doubt that another cross-roads in the industry right now is the pilot shortage currently being dealt with. Airlines are having difficulty training new pilots and retaining the pilots they do have. There have been incredible disruptions in airline operations from the flight shortage from flight delays and cancellations, to higher wage demands from pilots who are wanting to be paid more for their valuable work.. Signing bonuses and financial incentives are one of the only things keeping pilots on board for commercial airlines. This way of maintaining a staff is costing the industry millions of dollars. Many pilots that were flying before the pandemic have either retired early or stopped working for the industry altogether. All around, the cost of training new pilots, keeping reliable ones, and signing new ones onto a company have greatly driven the decrease in profit margins as the cost of pilot training, the pilot shortage, and increased wages for that demand are putting pressure on airlines.
Increased cost of operations: Over the years Airlines are having to tackle the increased cost of safety and added procedures related to regulations, technology, and guidelines. Airlines have spent millions on a number of methods to try and create a safe flying environment for passengers and to maintain safety protocols, such as decreased flight capacities, social distancing measures, and increased sanitary methods. These costs for the added safety of the industry have had no small toll, and account for many of the new costs of operations that airlines are seeing. Safety is just one example of the many aspects that are becoming increasingly costly to maintain. Other areas of concern that are increasing in cost are fuel, and maintenance.
More on this topic can be read in our article ‘The Aviation Industry and Economic Uncertainties’
How would an economic downturn affect the private charter segment?
Inflation cycles of the past have shown to be beneficial for some of those in the private charter segment. While there are undoubtedly ways that inflation will negatively affect the private charter segment of the industry, this area may be the most fit for survival and prosperity. Private charter segment hold Real assets like aircraft so, not only can inflation help offset the decreased resale value of aircraft over time but owning an aircraft can also generate rental income during this time.
Increased use: As seen with the pandemic, Privately owned aircraft could be used more often to escape the cost of airlines, and others will rent privately owned aircraft more often instead of buying their own, and passengers may turn out privately owned aircraft for travel as it may be beneficial given the obstacles that the airlines are facing. Individuals looking for safer and more exclusive travel that guarantees greater reliability than commercial flying will start to turn to the private charter sector for answers.
Stock buying: Investors involved with the private charter segments may consider increasing their investments to maximize potential benefits in the environment of increased cost of borrowing. In the current market conditions, less tangible assets, such as bonds and stocks are going to be most affected, which is why it may be appealing to invest with real assets such as aircraft. Aircraft offers exposure to long-term, physical assets that can provide yield and income over time, it’s no wonder why its appeal in an economy like this may be like to increase.
Inflation can cause dramatic distortions in financial statements, future earnings, and the overall performance of securities in global markets. Data from Jefferies Equity Research shows that over the last 20 years the real price of new aircraft has increased below the level of inflation, so aircraft have become cheap — Lease rates per seat are now lower in actual dollar terms, than they were 30 years ago.
How would an economic downturn affect the pilot training segment?
As the price of goods and services rise nationally they have significant implications for flight schools and students across the country. The situation is getting more complicated with inflation further driving prices and creating an unpredictable environment to plan for, which is why it is important to analyze how the pilot training segment can be affected during an economic crisis.
Increased cost for flight training and operations: As talked about in our article, ‘Inflation: Rising prices and its effects on pilots and their training’, the biggest concern for flight school and students is notable the cost of training and operations. The same situation is occurring with all areas of the industry; cost of running business has increased due to several factors such as fuel price hikes, increased cost of maintenance, and a higher demand for pilots and flight instructors. While some of these prices might linger, flight training operations around the country may increase prices to be able to sustainably operate. Aircraft can be extremely costly to operate, especially for smaller flight schools and private instructors. Insurance fees, taxes and registration fees, along with fuel, oil, and maintenance fees are hiking the price for operations up which is going to have a trickle down effect on the cost of pilot training for new students.
Increased cost for personnel (instructor and other staff): In the past, flight instructors have not been as in demand and the job itself was typically just a placeholder for pilots between certification and landing a job at an airline. Flight instructors were not paid nearly as much as other positions in the industry, and were not expected to be instructing for very long. With the state of the world today, there is a jumping demand for flight instructors, which means the flight instruction costs more than it used to. Schools and companies have had to provide better incentives to instructors, and new pilots as well.. New pilots are taking these opportunities to get into the industry in a surge so flight instructors are in a much better position than in previous years, with a steady demand and surge in pay. While this is good for instructors, the financial well-being of a flight school may need to be adjusted.
Lower enrollment rates: Inflation reduces the purchasing power of money, essentially for students, it’s going to cost more money to live overall. Even with incentives and the increased demands for pilots, some prospective pilots may take their time getting into the industry to try and wait for a better economy or to better prepare for the journey. Unless income increases at the same rate, people are worse off and are not reasonably able to attend flight school which can be very costly, this may lead to a slow increase for enrollment.
Rising insurance premiums: An important factor to consider is insurance and how premium rates are affected by inflation. Global insurance markets began to shift toward increased pricing in 2018, and have continued to increase since. The global insurance market for general aviation and other areas are expected to continue to follow this trend for the near future. This issue is looked at more in depth in our article “Increased” General Aviation accidents and their effect on insurance premiums.’
For more on the likely increase cost of operations, see our article ‘Inflation: Higher costs and their effects on Flight Schools’
How might the airlines and the private charter segment respond to an economic downturn?
To cope with the challenges airlines and the private charter segment are poised with, new strategies that increase the likelihood of these segments’ survival can be discovered. This has proved to bring its own set of problems, and can only be considered a new onslaught of challenges. Below are some ways in which airlines and the private charter sector of the industry may respond to the economic downturn.
Seek Government support: Particularly during the height of the pandemic, airlines used government support to keep their business and overall industry afloat. Given that the airlines had to reduce their operations up to 90%, the federal government was very interested in lending financial support to keep the airline industry from sinking. While many blame the airlines inability to have the proper working capital to deal with a shock such as stock buybacks, airlines need tremendous support, unless they have to lay off or furlough many employees. This does not bode well for the political space as job losses are never good politically. Incentives may also be given to those willing to invest in the aviation industry and the private sector.
Lowering costs: One of the first reactions is going to be to see where cost can be lowered. Any aviation business operating in a free market environment during an economic challenge will first try to lower their cost, the airline industry is no different. Airlines seem to do this first by parking aircraft that are not being used, and reducing staff to account for the significant reduction in revenue, the same goes for areas in the private charter segments. Investment in better operating procedures and technological interfaces to increase overall efficiency may be vital. Better equipment and operating procedures that would enable them to be more efficient, could allow airlines to maintain a low cost while they deal with other areas that are affected by inflation.
Mergers: While mergers are nothing new in the airlines, they may come about more often during economic crises’. The recent merger of Spirit and Frontier Airlines, can be seen as a way of dealing with fallout from the pandemic and with inflation as an insight. Primarily seeking to aid in operating, equipment, and routes, but also to aid in the always present pilot shortage, mergers can offer a valuable solution. In our article, “Airline Mergers: A Solution To The Pilot Shortage?”We did a deep dive into why airlines would want to merge.
Passenger Incentives: Incentives for passengers may be more levered by airlines and private charger sectors as they will likely try to retain the customers they can while getting new ones is often more of a challenge during economic downturns. Businesses are going to have to capitalize on their strengths in order to maintain their competitive edges to keep their customers. In this environment, consumers are more sensitive to the products and services that they are paying for, when it comes to something as costly as airfare, consumers are going to have an increased expectation for the industry to meet their needs. Some businesses may adopt strategies to attract customers, while others will likely leverage loyalty programs and other incentives to retain their customer and passenger base.
How might flight schools and aviation training institutions respond to an economic downturn?
Flight schools have had to deal with these challenges over the past few years and have been responding based on what they have learned about the environment and past experiences. In response to inflation, flight schools have had to be considerate in the way that they move about the industry. A previous article of ours, ‘3 Ways Aviation Businesses Are Coping With Inflation’, helps explain the effects of inflation and how flight schools have been responding.
Absorb the rising cost: It is with high hopes for flight schools and training institutions that economic downturns will not last for a very long time. Instead of changing business models or strategies, some businesses may find it easier to absorb the higher cost. Pushing increased cost onto students may cause a wide array of disruptions within the industry. It is likely better to remain stable for when inflation levels itself out; Absorbing the cost that comes from an economic downturn in order to remain stable and leverage themselves for when the conditions better may be a solution training institutions employ.
Increase efficiencies across the organization: Each part of a flight school’s operations is essential and can be delicately interdependent on other factors. Cutting cost or mitigating operations to save cost is not a favorable option, as the run-off effects can be unfortunate for other areas of operations. So, it is not easy at all to cut costs from traditional methods. The only way that flight schools can cut costs without these risks is to increase efficiency. A key way institutions can do this is through new technological capabilities that can reduce cost of operations without comprising any essential part of the production or operating process. Using state of the art operational management tools can allow schools to lower cost significantly in their operations, and can be quite useful during times of uncertainty, allowing schools to be able to accurately predict operating cost.
How can individual pilots prepare for an economic downturn?
In light of the economic environment that we are in, it is necessary for pilots to take the necessary actions to prepare for this approaching environment and how it may affect the industry that they work in. New and prospective pilots will especially need to be aware of the conditions that the industry is facing and what they can do to individually prepare for that.
Seek to make an assessment if the career is worth the investment today: Prospective pilots are going to need to do a critical analysis of the industry, the economy, and how those two are expected to change with each other in the coming years. While flight training may cost more in today’s economic environment, the future payoff may deem to be worth it. This is also true for current pilots looking to enter into new fields of the industry, getting new licenses’, or switching companies. Making an assessment of the career in terms of growth, over-all pay-back, and how long it would take to get into a comfortable place in the industry.
Seek alternative funding: Training is not typically something you would want to put off or delay so one the most helpful things pilots can do to deal with higher cost of training is to seek alternative ways to fund pilot training. Even current pilots need funding for the various other aspects of the industry, especially for those who are flight instructors or work in training facilities. There are alternative methods to paying out of pocket or traditional loans, such as grants, scholarships, and various other programs.
Seek to cut costs by using online tools and technologies: Another one of the most impactful ways to deal with the prospective increases in training cost is to mitigate cost by using online tools and fundamental technologies. When you are using other avenues to save cost, such as increasing efficiency by saving pilots, time, money, and effort to find the right instructors that will work with them, their schedule, and plan, is essential to saving for any pilot. So much is wasted when pilots spend an unnecessary amount of time finding the right instructor and training plan. For one, when pilots are seeking training, it is a very time consuming effort to even start the training itself. With great online tools to save pilots, time, money, and effort, they are better able to deal with the higher cost of training.
Get other licenses: Pilots and students may seek to prepare for these conditions by seeking out multiple pilot licenses and certifications to ensure they are well equipped to face whatever challenges that may occur in the industry. The pandemic has shown that the industry can be volatile to large-scale events such as an economic down-turn. Being able to be flexible in the industry incase of anything may be a path some pilots choose to take.
A glimpse into the future of the Industry
The future of the industry is being looked at in hopes for better conditions and prosperity. As all aspects of the aviation industry are going to be affected by an economic downturn, it is important to be aware of the changing conditions that are coming to light. It should be a top priority for airlines, private charter sectors, flight schools, and individual pilots themselves to know the ways they can improve their functions to survive and prosper during the prospective economic crisis.
It is observed that the U.S economy goes through periods of economic crises’, and while the causes vary, the outcomes are typically the same. A similar phenomenon can also be said for the aviation industry, it is seen that aviation is put at a crossroads periodically from a wide array of events. While challenges are presented, airlines, flight schools, and private charters have adjusted and changed course to stay a float given the multiple factors that make operations more difficult.
The industry, and pilots themselves are resilient and have proven to come out of any situation that’s been presented thus far. It should be no surprise that even while given the extensive challenges that are on the horizon, the industry is alive and well, with the potential to come out of these situations on top. It’s because of the drive, passion, and commitment by the industry through and through that makes it so strong, and able to overcome any obstacles that are sure to come. We cannot predict the future, we can only prepare for what’s expected, and do what we can in the present to set-up a prosperous strategy. As the world prepares for uncertain economic conditions, the aviation industry is already equipped with the strength, and knowledge from the past to make an impressive bounce-back.
Thank you for reading this week’s On Aviation™ full article. How do you expect an economic down-turn to affect the industry? Please share your thoughts in the comments below and remember to continue the conversation on our Twitter and Instagram.
Orlando – On Aviation™