Written by 1:36 pm WTF is going on with the Economy?!

The Economy From The Airlines’ (Grounded) Perspective

airlines_on_the_ground

This is a re-post of our fourth issue of our “WTF is going on with the Economy?” newsletter. You can read the original here. Get future issues delivered directly to your inbox. Sign up here.

As a person living abroad, or a worldly-minded individual, travel is a pillar of your life. 

Not very long ago, we wouldn’t think twice about hitting the road to explore the unknown, whether for the weekend or for the year. And for many of us, “hitting the road” meant going to the airport to catch a flight somewhere. 

Now, all of that’s changed (as you’re no doubt aware).  The Coronavirus and the efforts to stop its spread put the globe on lockdown.  Borders shut, and economies are hibernating.  

Airlines — the great symbol of our frontierless world  — were hit particularly hard.

Today, more than 60% of all passenger planes are sitting on the ground, awaiting their fate.  

In addition to the emotional pain of seeing our emblem of freedom grounded, the economic ramifications of a plane-less sky are even more significant.

The (economic) indicator in the sky  

In many ways, the travel industry is an accurate representation of the overall economy. When the economy is doing well, people travel more. When it slows down, folks tend to stay at home. 

 Airlines reflect this relationship even more closely.

Ticket prices, the number of routes flown, company financial statements paint a vivid economic picture.  

High ticket prices mean lots of people have extra money to spend on travel. 

If airlines are upgrading their premium products, then it’s safe to say that business travel is in high demand.  The destinations airlines choose to fly to are also telling. People tend to travel to places where the local economies are growing and avoid regions that aren’t. 

However, airlines have notoriously lousy operating models. Airplanes cost tens-to-hundreds of millions each. Buying a plane requires massive financing (aka loans) or a gigantic stack of cash.  Jet fuel — one of their main costs — is hostage to volatile oil markets.   

And if that all wasn’t enough, it’s a highly competitive industry, with only the most innovative and disruptive companies sustaining profitability.  

To that point, aviation tycoon Richard Branson once said: “If you want to be a millionaire, start with a billion dollars and launch a new airline.”  

I think that accurately sums up the airline business. And only in good times (Note: Branson’s Virgin Australia just declared into bankruptcy today).

When the economy goes down the drain, so too do the airlines. People stop traveling. Creditors come calling for the money borrowed to buy planes. Poorly run airlines fail or get acquired. 

In other words, the commercial aviation business is an excellent economic indicator.

Right now, we’re in one of those downturns. With the majority of the world’s commercial aircraft sitting on the ground and everything in a standstill, airlines can give us a clue as to how the future will look.

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How airlines will reveal the economic recovery 

Today in late April, we are beginning to hear the political conversation shift from healthcare to the economy (and high-five to you for helping to flatten the curve!).  We don’t know the definitive plan for reanimating it. What we do know is that, whatever that process may be, it will be done in baby steps.

Different sectors will open at various times. Some countries will continue to keep their borders shut. At a minimum, many will be selective about who comes in and from where. But as these restrictions ease, so too will airplanes get back into the skies.

As (the surviving) airlines slowly start flying again, they offer a couple of great clues on the overall economy (and consumer habits as well). 

First, as much as they would love to get all of their planes back in the air (an aircraft only makes money when it’s flying), there simply won’t be the demand for it. When the world slowly re-opens, airlines will add flights (capacity as they call it).  

How fast flights return will show how much demand there is for travel.  People only want to travel when they feel safe, or it’s absolutely necessary. The quicker people start flying, the better the economy is doing.  

Second, airfares across different classes will tell a story of who is traveling for what.  If there’s an uptick in business class bookings (corresponding to a fare increase), then it will indicate that demand for corporate travel. 

If there’s a growing demand for corporate travel, then we can assume businesses feel more confident about the economy. Likewise, if we see an uptick in economy class bookings, it can indicate that leisure travelers are comfortable traveling again.  

These two factors will give us an excellent indication of how airlines are assessing the global recovery.  While there is a lot of noise about medical progress, watching this sector of the travel industry will provide us with a clear signal as to where we stand.  

Of course, there’s plenty more we can talk about when it comes to airlines.  There’s a strong argument that the sector was in an unsustainable bubble before the crisis started. During this period, some airlines were operating on flawed business models. 

These companies were going to fail regardless of the Coronavirus.  Is it morally correct to give these firms a government bailout? Additionally, I think it’s safe to say that our pre-Corona model of globalization is history. What will air travel look like in the next iteration of our borderless world?  

Unfortunately, those conversations go out of the scope of this edition. 

For now, let’s be hopeful that travel will return. I’m sure many of us abroad are missing home at the moment.  For many of us, flying is the only feasible way to get back to our close friends and family. We’ll be back in the skies soon, moving the economy forward, one flight at a time. 

Abroaden is a company for expats, digital nomads and other world citizens looking for low-cost and transparent financial advice and investment management.

*Note that this article is for information and educational purposes only. It does not constitute financial advice.