Commentary: The aviation sector should bounce back sooner than expected
The Government assistance announced at Budget 2021 may well be the last tranche needed to help the industry stay afloat, says NUS Business School’s Jochen Wirtz.
SINGAPORE: Last month, Education Minister Lawrence Wong predicted that the pandemic would last for another four to five years before a post-COVID normalcy ensues.
I am more optimistic about travel and aviation.
Tourism also has a bright long-term growth outlook. I strongly believe that travel will come back and will continue to grow substantially beyond pre-COVID levels.
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For one, the middle class is growing rapidly across Asia and travel is one of the luxuries people will pursue.
Moreover, people all over have been bitten by the travel bug and are itching to travel to experience and explore the world once again after being earth-bound for almost a year.
Others have family and friends in different parts of the world they would like to meet while some have unfinished business such as returning to university, resuming business meetings or revisiting work projects.
LEISURE TRAVEL TAKING-OFF AGAIN
Whatever the reason, travel is itching to take-off again and will be buoyed by pent-up demand.
An Oliver Wyman global survey of 4,600 people on travel recovery at the end of last year showed that 63 per cent of respondents are open to go on leisure travel soon with most - 35 per cent - saying that they will be open to doing so once vaccinated.
I believe that factors such as vaccinations, herd immunity and testing improvements will reduce the need for quarantine and allow for more leisure travel in the coming six to 12 months.
Once travel is considered safe and quarantine restrictions are eased, this part of the business will resurge.
I do think that once more people around the world get vaccinated and we know more about the effects of the COVID-19 vaccines and how much protection they are according society, global regulations on travel will emerge accordingly.
Hopefully, vaccinated travellers are not carriers of the virus anymore as initial data from Israel suggests. If this is the case, a quick recovery of leisure travel to levels similar prior the pandemic can be expected.
There are already some signs of leisure travel recovering even if these are happening in small pockets.
Credit rating agency Fitch said in a published note this month that new restriction measures across Europe have delayed the recovery of leisure travel, and its "timing will be heavily influenced by the success of pandemic containment measures, including vaccination roll-outs".
It predicts such a recovery "most likely by May, although it will not reach pre-crisis levels in the short term".
"The budget and economy segments are able to rebound faster from downturns than the higher-tier segments, and we expect this to happen after this crisis."
The International Air Transportation Association too recently predicted "a 13 per cent increase in travel demand this year" - mostly leisure - even if that is a modest projection.
THE BUSINESS OF TRAVEL
However, leisure travellers are much more price-sensitive than business travellers. So, to entice leisure travellers at the onset, airlines will have to be careful at raising prices of tickets. By balancing demand, they will help increase flight loads, which will slowly reduce the losses they are incurring.
That is until business travel resumes some form of normalcy. Airlines typically need business travel to make flights profitable.
Unfortunately, the one blip among all this optimism is that business travel may take four to five years to reach pre-COVID levels.
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The transformation of moving many meetings online means that we need less sales, business development and consulting trips to be made.
It means that, without catching red-eye flights halfway around the world, the productivity of such executives increase as their scope and ways of working change too.
It appears that executives may find it necessary to only travel to further locations as it may be more cost-effective to replace regional travel with online communication, which means that more of their trips are likely to be long-haul compared to pre-COVID.
This should bode well for long-haul business travel. However, short to mid-haul trips will be severely affected with the new ways of working.
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GOVERNMENT SUPPORT IS IMPORTANT IN THE INTERIM
To help the industry to at least somewhat mitigate the loss of high-yield passengers, the recent S$870 million pledged in support of the aviation sector announced by Deputy Prime Minister and Minister for Finance Heng Swee Keat in this year’s budget would be welcomed by the airlines and other industry players.
These support measures include a 10 per cent landing charge rebate and a 50 per cent rental rebate for ground handling companies’ lounges and offices at the Changi and Seletar Airport terminals.
These cost savings are likely to translate into more capacity being deployed earlier as has already been seen with Singapore Airlines (SIA) resuming their daily non-stop flights to key US destinations despite operating at less than a quarter of the flight load.
Given that some airlines went under and those that survived have cut capacity and costs, they should be able to generate positive cash flows again within the coming 12 months even if business travellers trail leisure passengers.
However, while waiting for cash flow to ramp up, supplementary funding from the government is still needed to provide financial buffer and build resilience against future shocks.
By providing firms financial support while the airlines’ capacity utilisation is low allows them to up their game during this quieter period.
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Whether it is new hygiene solutions, contactless or least- contact passenger journeys, or the firms’ more aggressive push into digitisation, airlines will and can do these only if they are vigilant of the latest trends and confident they will survive this pandemic.
Giving firms this confidence and nudging them towards innovation will enable them to be well-poised in a recovery.
For an aviation hub such as Singapore, pulling ahead is important because of network effects.
For this ecosystem, volume builds volume. The higher the connectivity, the more volume will be attracted, making this a positive, self-reinforcing virtuous cycle.
These networks effect work for travellers and for cargo and explain why SIA resumed capacity quickly on key strategic destinations.
The importance of being a hub can be felt by the whole economy and not just the industry, hence justifying Government assistance. Aviation contributed some 12 per cent to Singapore’s GDP prior to the pandemic.
Tourists that come in to the country via air travel tend to stay for a few days leading to a positive impact on the revenues of hotels, F&B outlets, retail stores, taxies and more.
Business travellers too, who are more inclined to hold meetings, conventions and conferences in the city contribute to spending.
For Singapore, a cutting-edge, powerful aviation ecosystem directly benefits the nation as a whole. Ease of travel, cost competitiveness, and quality of the travel experience are all critically important for the many other sectors required to build the nation’s competitive edge.
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From wealth management, to tech start-up ecosystems and the large MNCs – a strong aviation sector that pulls away from its regional competitors helps to attract these businesses and contributes to Singapore’s future readiness and prosperity.
COST-CUTTING SHOULD CONTINUE
However, despite receiving continued Government assistance, to maintain this recovery momentum, airlines like SIA will have to take tough human capital decisions.
Players in the aviation sector may find that they will need to shed jobs to cut costs so that they can continue to be lean to respond to demand.
Here, they may be more willing to cut workers in job functions that can either be trained relatively quickly or are easily available in Singapore’s talent pool.
Airlines may find a lesser need to keep such staff on the payroll when they are underemployed.
Companies may find that, if headcount in these areas is too high, it can be reduced now and rebuilt in step with increasing traffic.
For specialist positions such as pilots and expert technicians, airlines may be more hesitant to let them go as such employees, once let go, may get alternative employment, leave Singapore or find that their skills are less up-to-date when they are ready to be re-employed.
Any of those scenarios may make it challenging for the airline to rehire them and rebuild that capability.
Therefore, it would be good to retain employees with those skills and employ them part-time perhaps to keep them relevant and on the payroll.
Here especially, the extension of the Jobs Support Scheme by a further six months is of great value. The Government may revisit the allocation depending on how fast travel bounces back.
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But for now, it appears that this may be the last tranche of support needed if leisure travel slowly recovers with increasing vaccination and global business travel creeping up too.
On their part, airlines need to look at cutting costs to remain lean and to position themselves to be ready for the upturn.
LISTEN: A labour MP, a business community leader and an economist break down the shifts underway in Singapore's Budget 2021 on CNA's Heart of the Matter podcast:
Professor Jochen Wirtz is vice dean for MBA programmes and a professor of marketing at National University of Singapore Business School. He is the co-author of the book “Intelligent Automation – Welcome to the World of Hyperautomation”.