In billionaire investor Warren Buffett’s words, “the world has changed for the airlines” because of COVID19. Buffett made these comments hours after Berkshire Hathway, sold its entire stake in four US airlines, despite the airlines having received aid from the US Government. The conglomerate, according to its annual report and company filings, owned an 11% stake in Delta Air Lines, Inc.; 10% in American Airlines; 10% in Southwest Airlines and 9% in United Airlines. Berkshire Hathway booked losses on the sales as Buffet went on to say they will not continue to fund a business “where we think that it is going to chew up money in the future“.

That last comment from Buffet highlights one of the two major issues faced by airlines, i.e. cash burn. The other one being lack of demand for air travel, which has practically evaporated because of the pandemic. The lack of demand has left airlines globally with little choice but to curtail schedules and ground aircraft to conserve cash, leaving frontline employees across the industry with little to do.

An industry estimate suggests every aircraft provides direct employment to as many as 100 airline employees which includes flight and cabin crews, ground staff, engineers, etc.

Even though senior executives and middle management teams continue to work relentlessly to navigate the business through this unforeseen and unprecedented crisis, most ground staff and crew, who form majority of an airline’s workforce, are waiting for demand for air travel to return – enabling them to take to the skies again.

Four out of six scheduled domestic airlines in India were loss making in the quarter ending December 2019. Falling demand as a result of a slowdown in the economy, high infrastructure costs and relentless capacity addition was already taking a toll on airline profitability before the pandemic. The challenges faced by Indian airlines are detailed by the author in the article titled “The Great Indian Aviation Paradox: Low fares fuelled by unsustainable capacity”.

All Indian airlines except Air Asia India[1], deploy between 20-30% of their capacity on international routes. The pandemic forced airlines in India to suspend various international routes due to travel restrictions and health advisories. Subsequently, demand for air travel within the country took a hit too. Air traffic had fallen 33% by March this year, i.e. before the Government of India directed airlines to suspend all operations by 23:59 IST hours on 24th March 2020. The suspension has since been extended twice as India extended its lockdowns and as of date, is valid up to 23:59 IST hours on 17^th May 2020. With no certainly of when operations will resume and little cash inflow, airlines are attempting to review and restructure all financial obligations. This was covered in great detail in the article “Lockdown Woes: Fleet Restructuring, Re-pricing & Renegotiating”

Human Capital Costs

Human capital is undoubtedly the key driver of the success of any business. More so for customer facing businesses where companies rely on their people to deliver a consistent and memorable experience to the customer which in turn guarantees repeat business.

Human capital costs or employee costs, form a large part of any organisation’s operating costs. They account for roughly 12-13% of a low-cost airline’s operating costs. For the quarter ending December 2019, India’s largest low-cost airline – IndiGo had a wage bill which stood at Rs.1,250.1 crores ($166 Million approx.). For the same quarter, SpiceJet – India’s second largest low-cost airline, had an employee cost which stood at Rs. 402.5 crores ($ 53.6 Million).

Organisations work flat out to both recruit and retain the best candidates. Indian airlines have been on a continuous recruitment spree in light of the double-digit growth in air travel over the last few years. As airlines continued to add capacity in this extremely price conscious market, they hired at breakneck speed to man the ever-growing scale of the business.

There is also significant recruitment cost to some roles at an airline. The left-hand seat in the flight deck is one such role. Rapid expansion at all airlines ensured that the country ran short of experienced Captains to command the huge influx of aircraft. India is the only country in the world with a six-month mandatory notice period before resignation for flight crew, which makes it extremely challenging to recruit Captains on short notice. This, then forced airlines to hire foreign nationals at considerably higher costs, sometimes four times as much when compared to what an Indian national of the same rank and experience would be paid.

In sharp contrast, filling the right-hand seat in the flight deck is significantly easier. There is a constant flow of Commercial Pilot License (CPL) holders who are often willing to invest significant sums of money to get type rated on the airline’s fleet type in order to be considered for the job. The training programme which includes a CPL and type rating, can cost anywhere between Rs. 50-80 lakhs ($ 66-106K) and can be completed in a year – provided things go as per plan. As a large number of trainee pilots fly overseas to complete their training, costs have increased in recent times as the Indian rupee has depreciated against most foreign currencies.

Airlines too have joined the fray to cash in on the boom and several have setup cadet training programmes where candidates are charged significantly more than what they would pay for a similar training programme, all for an opportunity to get trainee work experience with the particular airline. These programmes are run in partnership with various flight schools and come in handy when applying for a job as flight crew, however do not guarantee direct placement after the completion of the programme.

Just a year ago, airlines in India were handing out big bonuses to recruit experienced pilots. The cadet training programmes were oversubscribed and dreams of taking to the skies for young candidates, some who had just finished their schooling (a college/university degree is not a requirement to enrol to become a pilot[2]), were firmly on track. Unfortunately, the same cannot be said to hold good today.

With fleets grounded and no cash inflow, airlines have little choice but to curtail human capital costs.

Global demand shock

Unlike previous Black Swan events which impacted some parts of the world more than others, COVID19 has hit demand for air travel globally. Due of the nature of the virus and the lack of a vaccine, it is hard to estimate when demand for air travel, both domestic and international will return.

President of Emirates airlines – Tim Clark and Tony Douglas – CEO of Etihad Airways, warned in a joint statement that passenger demand will not return to pre-crisis levels until the year 2023. Similarly, Ed Bastian, CEO of Delta Air Lines, Inc. warned analysts during the company’s first quarter earnings call, that air travel would not rebound to pre-COVID19 levels for at least another three years.

A report from International Air Transport Association (IATA), estimates a 47% decline in passenger traffic in India. This prediction may be milder than what will happen in reality considering airlines in India will be resuming operations with only a fraction of their fleet to begin with. Domestic flights will lead the recovery for airlines as it is likely to be a while before international flight operations can resume, given the multiple travel restrictions and border closures. However, social distancing guidelines and the constant threat of contracting the virus will deter people to fly for the foreseeable future.

Moreover, COVID19 has, to an extent, eliminated the need for travel and face to face interaction. What once seemed like a futuristic, new age, Silicon Valley-ish way of doing business, is now the norm for all of us. Webinars, zoom calls and work from home in pyjamas, is the order of the day and this new method of doing business electronically, seems for the most part, to be working. These new realities will not appeal to everyone, especially not to someone who likes his or her travel but will definitely help increase productivity and help corporations reduce their travel expenditure to a great extent. This fundamental change in the way we work, is bound to have an impact on demand for air travel.

Without a significant increase in demand, airlines will have little choice but to right (read “down”)-size their fleets and return aircraft to lessors in order to reduce monthly cash outflow.

Leave without pay (LWP) i.e. furloughs and pay cuts

Airlines by nature, offer a service i.e. a seat on a flight, which is usually paid for well in advance but fulfilment requirements and obligations (by the airline) arise in the future. With fleets completely grounded and no certainty of when flights will resume, Indian airlines have little or no revenue coming in.

In order to reduce operational expenses, airlines have had to institute pay cuts for most employees. Most have announced LWP for a limited number of days for employees too in order to reduce the wage bill.

SpiceJet was the first airline in India to announce LWP for the period of the lockdown. Go Air followed suit shortly. In sharp contrast, IndiGo, despite announcing pay cuts across the airline and not having flown a single passenger, paid employees their entire salary for the month of April.

The level of pay cuts and LWP days, vary from airline to airline and greatly depend on cash reserves maintained by the airline (example, IndiGo) or committed promoters (example, Vistara). The real question on everyone’s mind is how long, in this current environment of depressed demand for travel will airlines continue to pay wages to employees and keep them on payroll?

Conclusion:

The impact of COVID19 is being felt across all sectors of the world economy. Aviation is probably the worst hit of them all. The imminent right sizing of airline fleets in India will undoubtedly impact jobs at all airlines.

In a gloomy job market ravaged by a pandemic, jobs generally and more so in aviation, would be hard to come by. Anyone laid off would likely find it extremely hard to be gainfully employed if everyone is looking to downsize. Roles which require specific skill sets especially ones which are non-transferrable to another industry or work environment e.g. flight crew, are likely to be the hardest hit.

Airlines must look at innovative ways to save as many jobs as possible. Job share schemes, where two employees are retained on a part time basis to perform a function normally fulfilled by one person are one such idea – however much of a coordination nightmare it would be in practicality are one such example. Employees too would need to be flexible in their approach towards the airlines and accept pay cuts or LWP for as long as demand for air travel remains subdued in light of the current circumstances. Knee jerk reactions by employees, will only result in aggravating the situation. It is often said that a low paying job in hand is way better than no job at all.

A glowing example of this are the pilots at the German airline Lufthansa who have offered to take a pay cut of up to 45% through June, 2022. This would save the airline 350 million Euros in employee costs. This is however on the condition that the airline not lay off any pilots that accept the concession.

With little or no idea about when demand for air travel will return, one cannot blame airlines for making sweeping changes to save their business. Unfortunately, these changes are bound to impact a large number of employees across the airline – an unavoidable and sad truth.

[1] Air Asia India’s application for grant of permission to start international operations is yet to receive approval from the Ministry of Civil Aviation, India

[2] As per FAQ No. 7. on the Directorate General of Civil Aviation’s Online Examination Portal-https://pariksha.dgca.gov.in/Form/PLT_FAQs