The Aviation Industry and Economic Uncertainties

The aviation industry has faced many challenges since deregulation in 1978. For the past several decades, the aviation community has worked through the challenges that arose from oil and energy crises’, global market challenges, and unresting political tensions. These economic challenges have traditionally been what the industry focuses their efforts on, and what experts have worked relentlessly to find the right strategies for. However, what we anticipate to work with is changing. The industry is now facing even broader economic challenges that need their own strategies, experts, and solutions.

Today the economic environment, nationally and globally, is shifting. Not only is this change unexpected, there are other challenges that amplify these deep seated economic challenges. The COVID-19 pandemic, social unrest, global politics, and pilot shortages are just a few of the new challenges that the aviation industry is now needing to find a solution for.

Key Takeaways

• • The aviation industry has worked to overcome traditional challenges and can reasonably know how to respond to issues. However, that is changing, and new challenges are arising that need to be addressed with new solutions and strategies. 
  • This specific time in history creates a unique set of circumstances that amplify the way the aviation industry is affected by these challenges. The global pandemic undoubtedly only aids to the height of these challenges and does not provide a clear end. 
  • Airlines, flight schools, and government agencies are responding in their respective ways. Airlines are attempting to sustain this time of economic uncertainty with a myriad of solutions, especially with mergers. Flights schools are responding to these challenges in ways that are untraditional, the largest hurdle is the pilot shortage the industry is currently facing. 

What make this time so unique?

The aviation industry and its airlines have weathered through many storms in the past, from regulations, to the tragedy of 911. Yet, the circumstances we are faced with in this time vastly differ from what the airlines have faced in the past. This difference is not primarily because of the magnitude of these problems but, because of the sheer number that are needing to be addressed at once. Airlines face more challenges now than they have faced in any other time. It is necessary to discuss these challenges and how they affect the aviation industry as a whole, below is a further explanation with what we are being faced with.

• The Global Pandemic – It is clear that from the onset of the global pandemic in early 2020 that the airline industry was about to face a world of challenges that it has never faced before. What was not clear is exactly how the airlines would be affected, what these effects would mean for business going forward, or how long this would last. A pandemic of this magnitude has not been seen since 1918, which was only years before the first aircraft took flight. Needless to say, the aviation industry was nonexistent then, airlines are dealing with a problem they have never dealt with before.  Not only does the airline have to deal with pandemic challenges at its foundation, airlines have to mount government intervention into the problem itself! The government intervened and dictated what needs to happen with the airlines, with new implementation to grounding, staffing, and daily operations. This caused the airline to lose money while simultaneously having to keep a full staff because of government regulations. Furthering these problems, there were all the challenges regarding employees. While the airlines that did receive financial support from the government were not allowed to fire employees, this was not completely restrictive as the airlines were still able to early retire and furlough respective employees from various positions. Coupled with the fact that the airlines had to park up to 90% of their aircraft and reduce their output by the same, there was a significant reduction in revenues.
• Geopolitical Challenges– Even prior to the war in Ukraine, airlines faced serious geopolitical tensions stemming from the world’s largest countries competing in various ways. When large countries compete in what is sometimes called trade, or currency wars, the airline industry is affected tremendously. The airline industry has been geared for increased world tensions since 2018. As the world’s largest countries such as the United States and China engage in an economic clash of the titans, the airline industry is left in the middle of trying to figure out business processes in the midst of geopolitical uncertainties.
• Social Instability – Social instability plays a major role in the challenges faced by the aviation industry, social upheavals always affect the airline industry as it does for almost any other industry. With serious demographic changes going on in the wider world, there are changes in the traveling group as well. Older and more affluent customers are either going private charter or stop traveling as frequently. Younger travelers are primarily picking up the slack. There may be a bigger challenge there because the younger travelers may not have been as affluent as the older travelers, and there is a considerably lower population for these next generations.
• Deep seated  economic challenges – The primary challenges related to the aviation industry regarding economics is the underlying fiscal and monetary policies in the countries that airlines operate within. Airlines operating in countries that employ expansionary fiscal and monetary policies may find that inflation prices put  their customers out of the market  itself. With global economics teetering, it is harder for some customers to be able to afford to use airlines at all.
• Increased Pilot Shortage – The pilot shortage is nothing new to this time. What makes the pilot shortage significantly more difficult for airlines currently, is all of the aforementioned challenges that compound with this shortage. In previous articles we have outlined the pilot shortage and insight for two challenges for the airlines. See articles; “Flight Schools – The Reason For The Pilot Shortage?”, “The Pilot Shortage – The Real “Culprits”…”, “The Pilot Shortage – Getting “Help” From The FAA…”, and “The Pilot Shortage – A Challenge for Airlines, Possible Boom for Flight Schools.”.

How have airlines been responding?

To cope with the myriad challenges facing them, airlines have employed strategies that increase the likelihood of individual airlines surviving. This has proved to bring its own set of problems, and can only be considered a new onslaught of challenges. The most significant of these challenges are discussed below:

• Increased 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 buyback and other financial ‘gimmicks’, that doesn’t negate that the airlines needed 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. Therefore the Federal government allocated Over $28 billion for airlines and contractors in the CARES Act Payroll Support to Air Carriers and Contractors.
• Lowering costs – Part of the most prudent action taken by the airlines is seeking to lower cost. Any business operating in a free market environment doing a major existential challenge will seek first to lower its operating cost, the airline industry is no different. The 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. Nonetheless, a lot of these actions were reversed by the federal government for airlines that accepted the payroll support to air carriers and contractors. Part of the stipulation was that airlines keep their employees and flights going. Adverse effects of this are that you had aircraft flying practically with no passengers, burning fuel and paying folks that were not earning any revenue. Economists and experts have their own opinion as to the ramification of this action.
• Investment in Better Operating Procedures – As airlines come out of the pandemic, they seek to invest in better equipment and operating procedures that would enable them to be more efficient moving forward. This allows airlines to maintain a low cost while they recoup the losses that they experienced at the height of the pandemic.
• Backward Integration to Start Flight Schools – The airline industry faces serious challenges with hiring and training pilots. Outside of the aircraft themselves, the crew is arguably the most important component in the smooth operations of any airline. The pilot shortage was amplified by the pandemic primarily because airlines took the opportunity to offer early retirement to many senior pilots, while other pilots that were furloughed, chose other jobs within the aviation industry itself. Because of this shortage in pilots, three airlines have recently either set up fully owned and operated flight schools, or only employ the most established and reputable flight schools in the industry. In our articles “Airlines And Pilot Training Academies” and “The Pilot Shortage – A Challenge for Airlines, Possible Boom for Flight Schools” we discuss this in more detail.
• Mergers – In an attempt to save on costs through scale economies, airlines have been willing to merge. While mergers are nothing new in the airlines they’ve come about as a result of a multitude of reasons. The recent merger of Spirit and Frontier Airlines, can be seen as a way of dealing with fallout from the pandemic. 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.

How have flight schools been responding?

For the most part, flight schools have been reacting in a way that is expected. Since the pandemic is now exacerbating the pilot shortage, flight schools are doing what they do best; Trying to increase capacity to take advantage of the new glut of individuals looking to enter a career as airline pilots. Particularly because airlines have explained their increased need for pilots, they have been offering a number of signing benefits that are very appealing to those who are looking to become airline pilots. This in itself enables flight schools in some areas to have a say in their business as laid out in our article “The Pilot Shortage – A Challenge for Airlines, Possible Boom for Flight Schools”

Flight schools have been showing up to take advantage of this new inflow of interest in people becoming pilots. Nonetheless, this also has its drawbacks for flight schools because, if there were ever any pullback in the demand for pilot training for whatever reason, the flight schools that invested in increased capacity, or opened new locations to take advantage of the current increased demand, may have to reduce capacity or close shop in the future.

Forecasting into the future.

The current economic, social, and geopolitical challenges will continue well into the future. They will also be amplified as time goes on. In  regards to the economic challenges, the end is an indefinite period. As a result, we believe that there are certain factors that are going to present more challenges as the airline industry moves forward. Some of these are discussed below.

• Inflation – Inflation and the increased cost of operations can possibly be the most destructive thing to the airline industry. Inflation tends to cause the cost of oil to increase which causes the cost of fuel to increase, sometimes significantly. Many times this increase in cost is unable to be passed to the flying public. One of the reasons why the cost is unable to be passed to the public is because they will still have a much cheaper alternative to travel than expensive airline tickets. Therefore when it comes to inflation, airlines are caught between a “rock and a hard place”. This is because there’s a need to increase prices to reflect the increased cost of operating, but in most cases the paying public is not willing to pay those prices. So the airline is left to absorb the cost as much as they can; Further reducing profit margins, in an industry that has very thin margins in the first place.
• The Business Cycle – While it’s counterintuitive, the business cycle actually does not refer to an individual, a business or an airline. It actually refers to a particular market cycle. In lay terms, It’s really the boom and bust of an economy. When times are good and the economy is growing,or through increased production of goods and services, or an expansionary monetary or fiscal policy, airlines generally do well. As people have more money to spend on things to include traveling. However, there is a point at which this boom turns into a bust as credit contracts or the expansionary monetary policies cease, at least for a time, for whatever reason. It is at this point that airlines struggle, because during the expansionary part of the cycle the airlines would have expanded their business operations to capture much of the demand that was as a result of the expanding economy. Whether or not this is warranted would be a discussion for another article. Nonetheless when the bus sets in, airlines struggle to stay afloat and in many cases have to be “bailed out“ by the federal government.
• Geopolitical Tensions – Do you think the globe is quite unstable? It has been this way for about a year now. However, things have gotten a little bit more unstable with the war in Ukraine, and much of the other challenges that will come as a result of that. Inflation, oil prices, food prices, world monetary policy, and other things will either directly or indirectly affect the aviation industry. One thing that is a particularly direct effect on the aviation industry is the virtual closing of civil aviation in the area surrounding the war in Ukraine, a secondary impact on global aviation and travel. In a recent digest “Ukraine War: The effects on civil aviation.” We shared some articles and news stories relating to the effects of the war on aviation and global travel.

How should flight schools prepare?

Flight schools should prepare for these uncertainties just like how they have been preparing for any other thing in the past; Increasing the number of clients served and lowering cost wherever possible. Flight schools should always seek to take advantage of every available tool to lower their cost whether that be operational or physical capital equipment cost, such as aircraft and facility. 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. Also, having long-term arrangements with things such as insurance and capital equipment can help to reduce short-term and long-term cost. Flight school should make every effort to increase the number of clients served to offset any increase in cost that cannot be controlled.

It is clear that tough times are ahead for the aviation industry. The aviation industry itself is resilient and robust in many ways. Yet, there are times when the industry may be very fragile in some capacities. Therefore the key here is that aviation industry players such as airlines and flight schools must be preparing for uncertainty. While they may not know what those uncertainties will bring in definite terms, they can look to the future to see what are some possible actions based on conditions today of various players and stakeholders, not only in the industry but outside, and make an informed prediction as to what may happen. Creating strong strategies to deal with those eventualities, if they should appear, is essential for the industry’s survival. It is clear that no one knows the future, and we are all groping through the fog. But what is for certain is that the company, individual, or organization that can see most clearly through the fog will be the winner, and that applies very much to the aviation industry and its stakeholders.

Thank you for reading this week’s On Aviation™ full article. Do you believe the aviation industry will come out of this time of unprecedented challenges irrevocably changed, if so, in what ways? Please share your thoughts in the comments below.

Orlando – On Aviation™