In a report titled ‘Enhancing Sustainable Economic Growth across the EU’, which I recently drafted in my role as member of the European Economic and Social Committee (EESC), I referred to how strategies for economic recovery, investment and sustainability would shape the future of the EU.
Economies across the EU have contracted because of COVID-19 restrictions and it will take several months to get anywhere close to where EU economies were prior to the crisis. Also, with governments borrowing from various sources to cover the unexpected and monumental hike in public spending, spending cuts may be required at some stage possibly accompanied by austerity measures, leading to depressed consumption and output as happened in Greece following the financial crisis in 2008.
A repeat of austerity measures would be counterproductive. The European Commission’s activation of the general escape clause within the Stability and Growth Pact (SGP), allowing euro area countries to temporarily suspend any adjustments required to meet medium-term fiscal targets was a step in the right direction.
However, a revision of SGP rules giving member states more fiscal space as we enter the post COVID-19 recovery phase is a sensible way forward.
Profit margins in the airline industry were already razor thin before COVID-19- Philip von Brockdorff
The post COVID-19 recovery phase will also need to consider the devastating effects of COVID-19 restrictive measures on the airline industry.
Throughout the crisis, with passenger operations collapsing, the world’s commercial airlines and other aviation businesses faced huge financial stress and bankruptcy in a number of cases from the unprecedented, unexpected, and broad shutdown of travel caused by the rapid spread of COVID-19.
As a consequence most airlines today can be described as financially walking wounded. The massive pressure on cash flow from extraordinary travel restrictions and the sudden drop in passenger demand has been followed by job losses. The latest airlines to announce job losses was Air France-KLM with 7,500 jobs lost from the French operation and with slower business predicted until 2024.
The job losses have indeed been staggering. Lufthansa announced 22,000 job losses; Air Canada 16,500; 12,000 at British Airways; and 6,000 at Qantas. And none of these airlines expect business to return to pre-pandemic levels before about 2024. A number of EU airlines have sought state aid in the form of loans to provide a lifeline and avoid bankruptcies but all loans need to be repaid and come with conditions including restructuring plans.
There is also the matter of preserving the entrepreneurial freedom of decision and action of the airline companies. For instance, when in 2019 the Dutch government bought almost 13 per cent stake in Air France-KLM, the French government, which owns 14 per cent, promptly sought assurances about the independence of the airline company in decision taking.
Whatever the composition of its shareholding, any airline company operates in a highly competitive environment and now more than ever as the airline industry attempts to recover from the total collapse in demand caused by the closure of air travel because of COVID-19.
Like other airlines, Air Malta is coming to terms with the consequences of extraordinary travel restrictions. It too has had to take difficult decisions including laying off almost 70 pilots, a decision taken against the backdrop of a request by the union representing the pilots for a €73 million early retirement pay-out. More difficult decisions may lie ahead but what is certain is that the new economics now facing Air Malta has completely changed the business environment.
It is against this backdrop that Air Malta will need to manage the road to recovery, knowing full well that the costs of flying may need to be further reduced to remain competitive. Added to this is the possibility that in some routes, and until air travel rebounds, the cost of flying may be more than not flying at all.
Air Malta will also need to ensure that its operations are at a size that can be financially sustainable given the prevailing uncertainty affecting passenger demand. Restoring the balance sheet will be a huge ask and for Air Malta to recover the effects of COVID-19 both the size and shape of the company may need to change. Whether we like it or not, COVID-19 has been the catalyst for change in a number of economic sectors. The airline industry is no exception.
The consequences of the COVID-19 crisis cannot be downplayed in any way, shape or form. In time passenger demand will rebound but the economics of the airline business is unlikely to return to how it was in 2019. The future of Air Malta will largely depend on how its management and all key players, not least the pilots and cabin crew, respond to the new economics.
There is no question that COVID-19 has reset the clock on decades-long aviation business. However, as Volodymyr Bilotkach highlighted in his 2017 publication ‘The Economics of Airlines’, profit margins in the airline industry were already razor-thin before COVID-19 with most airlines struggling to break even. As the airline industry recovers, profit margins are likely to be smaller than before COVID-19. This makes restructuring all the more painful but no less indispensable.
The price of air fares relative to operating costs will no doubt determine whether airline companies including Air Malta recover from the consequences of COVID-19 travel restrictions. As I mentioned in my EESC report, economic recovery post-COVID 19 will require bold and far-reaching decisions. That applies also to Air Malta. There is no other way.
Philip von Brockdorff is head, Department of Economics, University of Malta.