Updated: (Model extended to 3 years and adjusted to reflect cumulative impact of pilot retirements, fixed the MAX benefit for southwest)
The data from the first article about COVID-19 impact on pilot demand still remains relevant even though things do remain dynamic. The good news is cases seem to be reducing in places like China and potentially South Korea demonstrating that it likely can be contained and mitigated.
At the writing of this article other regions like the US, Japan and parts of Europe are grappling with growing numbers. Now that the impact on bookings are beginning to be understood SouthWest CEO Gary Kelly had an interesting insight when he shared ,”
“Through almost the entire month of February, our business was very solid. At the end of last week, we started seeing very sharp declines,” he said.
“It has a 9/11-like feel,” Kelly said, adding that the slowdown seemed to be motivated by fear, not by economic factors.https://www.dallasnews.com/news/public-health/2020/03/05/southwest-says-it-expects-200-to-300-revenue-drop-from-coronavirus/
As the drop in bookings become increasingly motivated by fear rather than economic factors this second article looks closely at the drop in traffic after another fear based traffic shock (9/11) and attempts to model the traffics impact on pilot demand. Keep in mind the 9/11 traffic was unique in that it was coupled with the dotcom bust, and a number of accounting scandals which led to a short lived recession. The airlines were also unhealthy and it began a domino of industry transformation (bankruptcy) unparalleled in airline history, as one of the final acts in the deregulation story.
Some things to notice
- The peak reduction in traffic is very similar to the reduction forecasted by the websites first article using the SARS traffic reduction (25-33% depending on exposure to the epidemic).
- It’s important to remember these are monthly averages, individual weeks could be worse or better
- Unlike the SARS traffic epidemic which modeled a V shape as it reflected the build and then recovery of the epidemic, the 9/11 traffic impact shows an immediate shock and then slow recovery as the economy went into a recession and the industry went into bankruptcy or tried to avoid bankruptcy.
- Recovery is definitely longer than the SARS model in the event of a drawn out recession.
So what does this do to a pilot demand model (Using a post 9/11 traffic model)?
Assuming that the airlines would need to
- staff for an 8% reduction for the next year from the pre-shock year(using the above models min reduction- May 2002) followed by a
- 0-5% (2.5% Average) reduction from the pre-shock year for the second year after the RPK drop
- 5% growth for year 3 from pre-shock year
The good news is this complete scenario is unlikely since the market forces pushing towards a recession (Dot Com bubble, Enron, etc) aren’t quite the same, allowing for faster recovery. Airlines are in a much healthier position and can absorb some losses and inefficiency’s in ways they could not back in 2001 due to large Legacy costs.
Also it is worth noting that some of the negative numbers may be dampened by
- proactive leaves of absence
- voluntary reduced line guarantee
- early retirements
- retirement buy outs
- additional sick calls due to a heightened focus on health.
These are difficult to model and may be different for each carrier.
However since a 9/11 type traffic drop was mentioned it was worth taking a closer look at what that would really look like potentially to long term traffic and Pilot Demand.
As noted in the first article, these numbers are an average, some carriers have more or less exposure than others and so these numbers might be worse or better in a 9/11 traffic drop and recovery.
It is the opinion of this article that even though the industry is seeing a 9/11 (fear based) traffic drop it doesn’t mean we will see that kind of slow recovery. It’s possible that traffic has remained higher than the (V) SARS model would have predicted until the tempo of COVID-19 concerns reached a breaking point, at which the industry saw a dramatic drop off to something closer to the trough of the V in the previous SARS epidemic. When we see the traffic “bottom-out” by watching for recovery, it will give the entire industry a much better idea when that recovery might be.
If the economy enters into a long recession due to loss in GDP it is possible it could slow a SARS like recovery to something in the middle between these two scenarios.
It is likely the next few months will be a bumpy and turbulent ride, but in the long run the fundamentals for air travel remain relatively unchanged. The airline industry has certainly been no stranger to turbulence and while the industry has become particularly adept at navigating market turbulence it is always wise for pilots to save and plan for a rainy day.
Having said this pilots can be optimistic that this will eventually pass, and demand will recover.