6
Aviation Economics
In the workshop’s fifth session, four speakers discussed aviation economics. In particular, the speakers discussed the effect of the COVID-19 pandemic on the economics and profitability of the airline industry. Further, they spoke to what can be done to mitigate these effects and improve the industry’s long-term economic outlook. The speakers talked about such issues as how the pandemic affected the economics of original equipment manufacturers (OEMs) such as Boeing and Airbus, of airlines and airports, of supply chains, and of various aviation support facilities. On those topics, the speakers examined what the effects have been to date and how long they are likely to last. Additionally, they spoke about whether the pandemic led to fundamental changes in the aviation industry that will help it better weather future disruptions of this nature.
The presentations were kicked off by Brian Pearce, the chief economist of the International Air Transport Association (IATA). Pearce discussed how the COVID pandemic affected the aviation industry economically and what can be expected in the future. Next was Ronald Epstein, a senior equity analyst at Bank of America Global Research, who provided a Wall Street perspective on COVID’s effects on the aviation industry. Kate Harback, the associate director of economics at the Institute of Health Economics, offered a broader, economics-based examination of the effects of the pandemic on the air travel industry. Harback particularly focused on Nav Canada, the nonprofit organization that provides air traffic services over Canada. The fourth speaker was Joel Otto, a strategy and business development executive at Collins Aerospace, a unit of Raytheon Technologies. Otto offered a perspective from the aviation industry’s supply chain. After the presentations, the four speakers took part in a question-and-answer session moderated by workshop planning committee member Parimal “PK” Kopardekar.
THE EFFECTS OF THE COVID PANDEMIC ON THE AVIATION SECTOR
In the first presentation, Pearce offered a highly detailed view of the economic effects of the COVID pandemic on the air travel industry. Pearce then provided forecasts of what is likely to happen with the industry over the coming years. When comparing the effects of the COVID pandemic on the aviation sector with the effects of past shocks—the 1991 global recession, the 9/11 terrorist attacks, the 2003 sudden acute respiratory syndrome (SARS) pandemic, and the Great Recession ending in 2009—it is clear that the COVID pandemic is in a class of its own. The largest drop in revenue passenger-miles from any of the past events was 20 percent following 9/11. In contrast, revenue passenger-miles fell by about 90 percent after COVID struck. Furthermore, the airline industry had fully
recovered within 6 to 18 months of each of those previous crises. However, at the time of the workshop, approximately 15 months into the COVID pandemic, revenue passenger-miles were still down by 60 to 70 percent, with no indication that the aviation sector would be fully recovered any time in the near future. In short, the effects of COVID on the aviation industry were far more severe and will last far longer than the effects of any previous shock.
In economic terms, the effects of COVID have been on the demand side, Pearce noted, rather than on the supply side. Because of travel restrictions, people are not able to spend money on air travel. This is significant because evidence from other areas of economics, particularly in labor markets, shows that shocks can have long-lasting effects.
Historically, Pearce said, the aviation industry has seen major changes over the decades, with a 90 percent drop in the real cost of air transport since 1950. The changes included such things as the introduction of the Boeing 707 in the late 1950s, the 1973 oil crisis, the deregulation of the U.S. airline market in the late 1970s, the deregulation of the European Union airline market in the early 1990s, and the Great Recession. The drop in cost was due mainly to disrupting factors on the supply side. This included technological innovations, such as the introduction of more efficient planes, and widespread deregulation. These factors lead to increased competition and innovation in business models, such as the creation of low-cost carriers.
One of these changes in the business model was the addition of more city-pairs served by airline flight. The number of city-pairs almost doubled between 1990 and 2019. Not only are those direct connections important to users, Pearce commented, but also they bring wider economic benefits by lowering barriers to trade, supply chains, investment, and tourism. Unfortunately, he added, the number of city-pairs has dropped since the beginning of the COVID pandemic. The drop could cause some economic damage because of the loss of connectivity.
As an example, Pearce pointed to the connectivity changes in the China market. After dropping sharply in the first quarter of 2020, domestic connectivity recovered to about half of pre-COVID levels by the end of the year. The same thing has happened in the United States. In both cases, the international connectivity remained far lower—at about 15 percent of 2019 levels, in China’s case—than it was before the pandemic.
By contrast, he added, air cargo services have not been affected much. There was a dip of about 20 percent after the pandemic began, mainly owing to a drop in manufacturing capacity. Air cargo levels are now about where they were at the end of 2019.
The major reason that international passenger air travel remains so low, Pearce explained, is the collection of travel restrictions. Such restrictions have been put into place by various countries to avoid potentially infected people from carrying COVID infections between countries. The restrictions have been eased somewhat since spring 2020, but concern about viral variants has kept them in place to a significant enough level that air travel remains at a small fraction of its pre-COVID level. “I think it would be a mistake to think that there’s no demand for air travel,” he said. Instead, air travel is being constrained mainly by these restrictions.
However, with the rollout of COVID vaccines in countries around the world, Pearce predicted, “I think we do have light at the end of the tunnel for international travel.” Forecasts at the time of the workshop indicated, for instance, that the United States and United Kingdom should reach a point where 75 percent of their populations were vaccinated by late July or August 2021, with many other countries following by late 2021 or 2022. If one assumes that 75 percent vaccination rates should leave a country with herd immunity, this indicates that these countries would be in a good position to resume international travel, as long as the travel was between countries with high levels of vaccination. This means, he said, that there should be a staged reopening of international air travel markets, “and the big uncertainty, apart from the behavior of the virus and apart from the effectiveness of vaccines on new variants which, of course, could change this picture, the big uncertainty is governments and their attitude to risk.” Particularly risk-averse governments may be very slow in opening their borders to international travel. That is a major uncertainly in forecasting the recovery of international air travel.
Explaining why he believes that there is pent-up demand for air travel, Pearce showed some data on how passenger-miles changed over time. It was clear that whenever restrictions were loosened—as when quarantine restrictions were lifted for travel within Europe—air travel increased. “But I do think that there is a possibility that we could see some permanent impacts on demand,” he added. Although historically demand for air travel has proven to be very resilient and has always rebounded after shocks, some changes instituted in response to the COVID pandemic may prove permanent. In particular, the use of Zoom and similar meeting applications may lead
businesses to substitute these sorts of remote meetings for travel in many cases, particularly for things like conferences and trade shows, internal meetings and trainings, and product launches. Travel for such things as developing client relationships and leadership meetings will probably be less likely to be replaced by Zoom meetings once it is possible to travel internationally.
When all of these factors are considered, Pearce summed up, he forecast that air travel in 2021 will turn out to be about 52 percent of the 2019 level, and that will jump sharply in 2022, up to 88 percent of 2019. By 2023, it will climb to 105 percent of the 2019 figures. Still, he added, even after this recovery the global air travel market is likely to be about 7–10 percent less than it would have been if the pandemic had never happened. This will be a permanent loss. Another way to think about it is that because the amount of global air travel was increasing at an annual rate of about 3.9 percent up to 2019, the air travel sector will have lost about 2 to 3 years’ worth of growth. “Which, given the scale of the crisis, is actually not very much,” he concluded.
Nonetheless, he said, airline revenues have taken a major hit by any measure. The forecast is that global airline revenues for 2021 will be just 55 percent of the level in 2019. Because airlines have a large amount of fixed and semi-fixed costs, they have been “burning through cash.” This led to major losses—an estimated $173 billion total in 2020 and 2021. Pearce predicted this will have long-lasting effects on airline profitability, although those effects will vary by country. Airlines in the United States, with its huge domestic air travel market, will return to profitability much more quickly than those in other parts of the world, such as Europe, where the industry is more dependent on international travel.
Despite those losses, Pearce continued, very few airlines have failed. Given the scale of the shock, it is astonishing. Much of the reason is that governments stepped in with subsidies, loans, loan guarantees, wage subsidies, and other economic measures to keep the airlines afloat. IATA has estimated that governments around the world pumped in about $228 billion to essentially keep the airline industry alive.
There remain some possible longer-term issues, Pearce said. The support has not been even across regions, which could lead to competitive advantages and disadvantages for airlines in different countries. More importantly, much of the support—about 46 percent—has been in loans or the deferral of liabilities, so these are funds the airlines will have to pay back. The industry has taken on an enormous amount of debt—not just from government aid, but also from the capital markets and the banks—to survive. Once the industry gets back to generating a positive cash flow, much of that will be absorbed in paying down that debt. This means that there will be much less money available for investment, and that issue could linger for a number of years.
Last, Pearce spoke about another potential effect of the widespread government involvement in the airline industry since 2020. Typically, an economic shock or crisis leads to the failure of weaker companies and consolidation, which leaves the industry in a stronger position to recover. However, with the presence of this much taxpayers’ money, governments may be reluctant to allow the restructuring of the industry, thus causing the aviation sector to avoid the usual Darwinian process of “creative destruction.” Without that process to make the industry stronger and more resilient, he speculated, the recovery that would normally be expected on the supply side of the industry might be delayed.
A VIEW FROM WALL STREET
In the next talk, Epstein offered a Wall Street analyst’s take on the aviation industry—how the COVID pandemic affected it, where it is now, and what is its likely future.
He began by offering some context with Bank of America economic forecasts. For instance, the U.S. gross domestic product (GDP), which dropped by 3.5 percent in 2020, is forecast to grow by 7.0 percent in 2021 and by 5.5 percent in 2022. The global GDP is predicted to grow at a somewhat slower rate. With this strong GDP growth, inflation in the United States is predicted to be 3.6 percent in 2021, dropping to 2.5 percent in 2022, while U.S. short-term interest rates are predicted to be stable at 0.13 percent through all of 2020–2022. However, globally short-term interest rates are significantly higher and are expected to increase somewhat over the next couple of years.
Next, Epstein showed data on stock prices of a number of companies in the aviation and defense industries. Generally speaking, these stocks did very poorly in 2020, underperforming the NASDAQ and S&P500 stock
indexes significantly. Some of the worst performers in the group were the aircraft manufacturers Bombardier, Embraer, and Boeing, along with companies that manufacture parts and provide services to these manufacturers, such as the Triumph Group and Spirit Aerosystems. In 2021, however, the picture was almost completely reversed, with the poor performers of 2020 being among the best performers in the group. For example, Embraer, which lost 65.1 percent of its value in 2020, was up by 97.8 percent through May 27, 2021.
Those in the industry refer to this pattern as the “reopening trade.” In general, there has been a great deal of investment in those aviation companies that were hit hard in 2020, driving their stock prices up. In many cases, the stock prices are above their pre-pandemic levels. What this means, Epstein explains, is that after all the various factors are considered, such as supply-chain concerns and the effects of inflation and interest rates, the market expects a robust recovery from the commercial aerospace industry.
Epstein offered observations about the extent of the recovery of the air travel industry that were similar to those made by Pearce. The recovery has been best in North America and the Asia-Pacific region, with poorer performance in the Middle East and Europe. Much of this is owing to the fact that international air travel remains very depressed, and the recovery is slower in those areas in which international travel is a larger proportion of all air travel. Only about one-third of total global air traffic is domestic and two-thirds international, he said. “That international piece really has to come back for the market to heal.”
It is possible to gain different and specific insights into the industry’s health by looking at engine cycle data. These data provide information on how much each type of aircraft is being flown. Most types of aircraft are being used much less than before the pandemic. Some patterns differ, however, and the differences offer details about the pandemic’s effects on air travel. Newer aircraft are getting more usage, for example, and the aircraft that are more flexible in terms of deployment by airlines are also getting more use.
Data on orders for new aircraft from the manufacturers and, in particular, the backlog in orders offer a different sort of insight. For instance, after the pandemic hit, airlines delayed orders as it became clear that they would not need new aircraft. Boeing was hit harder by the order delays than Airbus because in addition to the COVID-related issues, Boeing’s issues with its 737 MAX, which had two well-publicized crashes, led to delays in order fulfillment.
Similarly, Epstein said that data on market lease rates point to patterns in the airline industry. As expected, the numbers of planes leased declined sharply after the COVID pandemic hit, with greater drops for the leasing of older planes. However, the overall patterns were different for narrow-body versus wide-body planes. In general, the lease rates for narrow-body planes had been stable for about a decade before 2020. In contrast, the numbers of wide-body planes being leased had been steadily dropping since about 2015. In short, he said, the wide-body market was already in a bit of a recession pre-COVID, and the pandemic made things far worse. “We’re not expecting a recovery in the wide-body market probably until the mid-2020s,” he added. The narrow-body market will recover much, much sooner.
Switching gears, Epstein said that one factor that will shape the aviation industry, independent of the COVID pandemic, is innovation. As an example, he pointed to the Boom Overture, a supersonic aircraft planned for delivery in 2029. There is a great deal of risk involved with developing this plane, he added, and its delivery could well be delayed. “But the point is that we’ve seen innovation going on in the supersonic front, we’ve seen innovation going on in broader air mobility.” There are probably 100 start-ups working on urban air mobility and aircraft with electric propulsion or hydrogen propulsion. “We’re going through a period of innovation in civil aviation that honestly we haven’t seen for decades,” he said. “It’s exciting to see all this happening. Some of the stuff is really going to stick, and some of these start-ups will end up being key players in a future transportation system that has different forms of air mobility. And while the pandemic may have slowed this wave of innovation down a bit, it has not stopped it.”
Another important happening in the aviation industry, he continued, is an imbalance in the market between Boeing and Airbus. This imbalance is caused by Boeing’s failure to introduce a new model aimed at the middle of the market—aircraft with a range longer than the relatively short-range planes such as the Boeing 737-800, but not as long as truly long-range jets such as the Boeing 777 or the Airbus A380. The Airbus 321neo, aimed at this market, is getting a large number of orders for airlines looking to replace their aging Boeing 757s. Boeing really does not have a replacement for this model. This is something that Boeing will ultimately have to address, Epstein suggested.
Yet another factor that will likely shape the aviation industry in the coming years, he continued, is the worsening relationship between the United States and China. Since the Obama administration, the United States has been ramping up its competition with China. Since the pandemic, both the United States and China have been more hawkish in their attitudes toward the other. In particular, the Biden administration “has come out swinging,” Epstein said, and is pushing China on human rights issues and looking to form multilateral alliances to counter Chinese financial and military might. This has important implications for Boeing, among other companies, as China is an important market for it. China has bought about one-third of the 737 MAX planes Boeing has sold, for instance. Yet China is developing its own narrow-body jetliner, the C919, and it may happen that trade tensions between China and the United States end up holding the aviation industry hostage. One potential result could be the emergence of two parallel aircraft industries, much like it was in the days of the Soviet Union. “That’s probably not good for anybody,” he suggested.
Epstein closed with a warning. Showing a graph of the number of flights in India, he pointed out that the country’s air travel industry seemed to be recovering nicely until April 2021. Then a surge in COVID cases caused the number of passengers traveling to plunge again. The moral of this, he said, is that there are no guarantees about the recovery. Many things, such as the emergence of new variants, are out of the control of the world’s governments and corporations. “My hope is everything continues to go on the right direction,” he concluded, “but I think it’s important to bear in mind that there is an underlying fragility to this whole thing that is sadly out of our hands.”
ECONOMIC CONSIDERATIONS CONCERNING THE EFFECTS OF THE COVID PANDEMIC
Following Epstein’s exploration of the aviation industry from the perspective of a Wall Street analyst, Harback offered a somewhat broader view as an economist. Noting that she has a background both in aviation economics and in health economics, she said that gives her an interesting perspective on how the aviation industry has been affected by the COVID pandemic. Because she was following two speakers who had already described how airline passenger-miles and revenue had evolved since the beginning of 2020, she said that she would skip presenting data graphs and “take a little bit more of an anecdotal approach to peeking behind what was moving some of these time-series plots.”
In thinking about the economics of the aviation industry now, Harback said, there are three key elements to take into consideration: demand, the business model, and policy. The three are interconnected, pushing and pulling on each other. Understanding the system requires delving into each of these pieces. One thing to keep in mind, she added, is that there is considerable uncertainty in each of these areas about what will likely happen next.
On the demand side, the discussion has been largely split between what will happen with business travel and what will happen with leisure travel, Harback said. Observers have offered different takes on each of these areas of demands. More generally, she said, there is a great deal of heterogeneity in demand, and much of it has its roots in public health policy differences. Considering the percentages of people who have gotten at least one vaccine in different countries around the world, she observed that some of the variations are owing to how much different countries prioritized people getting their first shots versus getting both shots. This can have a major effect on demand for air travel because while people who have had just one shot may be at much lower risk for severe health outcomes and hospitalization, they may not be allowed on a plane. So, there is a great deal of nuance in these policy decisions, with officials in different places choosing to optimize in terms of outcomes—reducing cases versus reducing severe outcomes, for instance.
This sort of global heterogeneity in vaccine regimes and public health decisions can have some unexpected consequences for travel demand, Harback observed. She offered, as an example, how a Bruce Springsteen show was originally announced to reopen on Broadway. The policy stated that those who had vaccines approved by the Food and Drug Administration (FDA) were to be admitted. This policy left out a lot of people in Canada who might have chosen to travel to New York for the Springsteen show and other attractions. Many of them received the AstraZeneca vaccine, which is not FDA-approved. Thus, one decision by a venue in one location could have implications for international travel, she concluded.
Ultimately, she continued, the policy was changed and people with the AstraZeneca vaccine were allowed to attend the show. However, this sort of thing does create a lot of uncertainty among travelers who are planning their vacations and may lead them ultimately to delay their travel plans. The show is one small anecdotal example of how policy can affect travel demand, but it points to the likelihood of other such travel-relevant policies that may not appear to be relevant to travel upon first examination.
The situation can be complicated by reactions even to decisions that were taken to ensure the health of everyone. As an example, Harback noted that anti-vaxxers protested the Springsteen show. More seriously, many people have resisted mask mandates on commercial flights and have even attacked members of the cabin crew over the policy.
Transitioning from the demand factor to the business model factor, Harback told a story that ties back into policy and what can be done to mitigate the effects of COVID in support of the air travel industry. The story related to the COVID-related experience of Nav Canada, which is a nonprofit organization providing air navigation services for travel over Canada. Because it is not a government entity, it relies on user fees to provide its services. This dependence led to serious challenges during the COVID pandemic as airlines cut their numbers of flights dramatically. The number of flights in April 2020 was just 30 percent of what it had been in April 2019. As a result, Nav Canada lost a significant amount of its funding. “When you depend on user fees, that was just gutting,” she observed.
To weather this, Nav Canada made a number of changes to its operations. One of the first changes the corporation made was reducing its level of services—for example, by suspending nighttime service in certain locations. “It certainly helped them to control costs and to scale the effort of providing the air traffic control to the level of traffic that was there,” Harback observed. Nav Canada also increased its service fees and streamlined its workforce. Some of the changes are being rolled back as the effects of the pandemic on air travel lessen, but some of them are likely to be permanent if they provide real operational efficiencies.
Nav Canada was also helped by funding through the Canadian Emergency Wage Subsidy program, which was similar to the Payroll Protection Program in the United States. “I think that’s a good example of the kind of policy [that can be used] to mitigate the impact and ensure viability,” Harback said. “I don’t think we’re out of the woods yet, so I think there could really be a continuing role for the kind of policy that’s a broader economic policy in addition to industry-specific measures.”
In the case of the response to the COVID pandemic, much of the policy was made on the fly. As the situation was so unprecedented, policy makers and analysts did not have the tools to fine-tune programs and policies to get the desired result. Part of the challenge, Harback said, was the interconnectedness between the various factors—demand, the business model, and policy. Thus, to prepare for future crises it is important to start thinking about how to carry out analyses across various domains.
Currently, public health policy tends to be informed by models of infectious disease. However, models of infectious disease rarely consider industry-specific effects or considerations, she said. “We’re lucky if they can be tailored to different populations.” Thus, there is a need to work across silos and understand how the different factors interact and produce outcomes in a variety of settings. “Having a rigorous assessment of what the trade-offs and consequences would be can give folks a different lens for evaluating those decisions,” she suggested. For instance, when making a decision as to whether to keep children out of school and use distance learning, one could take into account such factors as how much the educational progress of children is pushed back by distance learning and whether some populations are more affected by remote learning than others. One might then, for example, take additional steps to change the nature of the distance learning so that it has less of an impact.
The same thing is true for transportation, she continued. It should be possible to tailor a policy to take several factors into consideration. One would need to examine the various interdependencies, gain a better understanding of the consequences of specific industry policy, and determine how responses within population groups either reinforce the policy or work against it. This is the goal of the One Society Network, which is funded by the Natural Sciences and Engineering Research Council of Canada. It is working to understand how to string the various analyses together to understand the ramifications of a policy in a more rigorous way. A year after the start of the pandemic, there is a great deal more evidence and a number of researchers working on pieces of the puzzle.
One focus of the One Society program will be investigating the drivers of aviation and what policies might have been more effective in responding to the pandemic, she said. The ultimate goal is to give the policy makers of the future better tools to support their decisions in responding to a similar crisis, pandemic or otherwise, that may come along.
A PERSPECTIVE FROM THE AVIATION SUPPLY CHAIN
Otto offered yet another perspective on the aviation industry and its pandemic response, speaking as an insider of the supply chain that supports the commercial aviation industry. In 2020, he began, the commercial aviation industry, the defense industry, and aerospace in general were anticipating a strong future. This was good for the overall U.S. economy because aviation plays a major role. Within the United States, aerospace and defense employ more than 2 million people, and the average compensation plus benefits for those people is around $100,000 a year. Furthermore, for every 100 airline jobs there are about 300 jobs outside the airline industry that are supported directly or indirectly by the airline industry. Globally, that works out to nearly 11 million jobs that the aviation industry is responsible for.
From a GDP perspective, he continued, aerospace and defense contribute more across the globe than either automobile or pharmaceutical manufacturing. Furthermore, while aerospace and defense are only the 41st largest industry segment in the United States, together they are the 7th leading contributor to overall productivity. In short, this sector has a large impact on the U.S. economy both directly and indirectly.
However, the sector took a major financial hit from the COVID pandemic, Otto said. While the aerospace and defense industry was approaching a valuation of $1 trillion in 2019, it lost about one-tenth of that value owing to the pandemic. The impact to the U.S. and global economy was even larger given the ripple effects in terms of, for example, jobs indirectly supported by commercial aviation. Employment in aircraft manufacturers was also affected as the airlines scaled back and delayed their orders of new airplanes. The commercial aviation industry probably lost more than 100,000 jobs, he said. If it were not for the Payroll Protection Program and the rapid development of vaccines, the loss could have easily been 300,000 jobs.
Otto’s employer, Collins Aerospace, was definitely affected, he continued. It took drastic measures to reduce costs, including layoffs, furloughs, pay freezes, and other actions that affected people’s livelihood and the larger economy. Collins was relatively lucky because it has a significant presence in the defense sector. Many other companies were dedicated completely to the commercial air travel sector, and they were hit much harder, with some closing permanently. Some will try to return but are not likely to succeed, Otto continued. This will lead to a major reshaping to the supply chain for the commercial air industry.
On the positive side, the industry does seem to be starting to recover as more people are vaccinated and travel starts to come back. Indeed, Otto said the United States and China are actually somewhat better off than Collins and Raytheon were expecting at this point in the recovery. Still, many individuals have left the industry, either because of retirement or a career shift in response to the job cuts. That will pose a change to companies in this area as they ramp up operations. “For us,” he said, “it’s still undetermined what that headwind is going to pose in terms of the recovery and how that’s going to look.”
This has been the greatest disruption commercial aviation has ever seen, and it will have lingering effects for a significant period of time. Nevertheless, Collins is focusing on what may well prove to be a silver lining. He said, “We think that this disruption is a once-in-a-lifetime opportunity to think about how to transform air travel.” The company is also examining how to minimize the likelihood and damage of future disruptions, he added.
In addressing the disruption caused by the COVID pandemic, Otto continued, Collins and Raytheon have seen a great deal of collaboration across the aviation industry. Such collaborations even cross over to other sectors, such as public health. Before the pandemic, people at Collins had spent little time thinking about public health, but the threat of disease transmission during air travel led them to work with public health researchers at Harvard University and a number of other institutions. The result was the layered approach to safety discussed earlier in the workshop, with the combination of masks, cleaning protocols, ventilation and filtration, and other measures producing significant protection.
One important component of the industry response to the pandemic was education, Otto said. Early on, there was a great deal of misinformation, which created fear, uncertainty, and doubt in the public. An industry-wide
collaboration led by various associations, such as IATA and Airlines for America, worked to find a consistent message that could reach a broad audience and get people flying once restrictions were lifted.
People at Collins thought about how they could contribute, he continued, and early on they created a task force with a goal of redefining air travel and making people feel safe. Collins is involved in many different aspects of air travel—providing airport solutions related to checking into flights and going through security, manufacturing aircraft seats and other components of aircraft interiors, building management systems for air filtration and circulation, and so on. The company worked with its customers on redesigning the passenger experience with an emphasis on health. The idea was to create an airport experience of the future in which safety was a focus from the time a passenger entered an airport until that passenger left on a plane. The experience would be increasingly contactless and frictionless.
In moving toward this future, given the financial straits that many airlines will be facing in the coming years, it will be important to develop innovative solutions that are easy to adopt and do not demand significant capital outlays, Otto stated. He offered the example of antimicrobial coatings that Collins is developing that could be applied to existing meal trays, thus avoiding the need for airlines to replace their trays. This would be easier and less expensive, but just as effective in reducing transmission risks as the replacement of the trays.
Developing new technologies is not enough, he continued. A public-private partnership is needed to get stakeholders thinking about the likely characteristics of the next pandemic and what should be put in place now to respond in a more systemic way.
One of the areas that deserved particular attention, Otto said, is finding efficient ways to track vaccination status and test results of passengers as they move among airports and countries. Something like a health passport could be particularly useful, he suggested, but developing one will require industry partnering with governments so that an ultimate solution could be widely, if not universally, accepted. This happened in the aftermath of the 9/11 terrorist attacks, he noted. “We saw governments, airlines, airports, everybody in the commercial aviation industry adopt new technologies, procedures, and policies very quickly to get things back up and going, and that’s what we need today. It’s just a different threat that we’re dealing with.”
Ultimately, he concluded, the major goal should be getting industry and government to work together to make the air travel system healthier, easier to use, and more resilient. Then the next time something happens to disrupt that system, the response will be much faster and more effective. The people at Collins are focused on helping the air travel industry beyond the return to normalcy. The industry will remain vulnerable to future threats unless it begins to address some of the system issues he described.
DISCUSSION
In the discussion period, Kopardekar began by asking the panelists what they see as burning research needs and what should be done to prepare for future events. Pearce answered first and addressed the second part of the question. One issue that was highlighted by the COVID pandemic, he began, was that the airline sector was carrying a great deal of debt before the pandemic. The debt limited its resiliency in the face of crisis. The sector’s cost structure, which includes a large amount of fixed costs, added to its lack of flexibility and resiliency. So, one important thing to examine, he said, is how to get more flexibility into this industry, not only among the airlines but also for the airports and other components as well. The companies’ debt-laden balance sheets mean that when a crisis emerges that sharply decreases passengers-miles and revenue, many of the players will go bust without government intervention.
It might also be useful, he added, to look at the rules that govern international aviation business. Many of them were designed in the 1940s. In particular, regulations concerning ownership and control restrict access to equity for many companies in the airline sector. One result is that even though this is a global industry, the airlines and other companies in the sector are national companies. Without the possibility of cross-border companies, the industry has far less consolidation that it would otherwise have had—mainly owing to a decades-old regulatory structure.
Otto followed that up by saying that there will always be disruptions of one sort or another and that one should assume that the aviation industry will face disruptions on a periodic basis. The question then becomes how extensive they will be and what can be done to recover from them. One of the keys, he suggested, will be
learning to work across disciplines and include more cross-disciplinary thinking when dealing with such things as the interactions between aviation and public health. “I think we can solve the problem inside the tube of the airplane,” he said. “We’ve got a lot of ideas of how to make that safe.” However, a more difficult problem will be addressing the broader ramifications of moving people around the globe in the face of an infectious disease risk. How can the airline industry avoid disruptions to that global movement, keep people safe, and limit the spread of that disease around the world? That is an important question to address.
Harback spoke next and suggested that it would make sense for the aviation industry to become more risk averse relative to threats like COVID. This would entail having procedures in place so that at the first sign of an emerging pandemic, governments and the airline industry can quickly shut down transmission. It might result in a certain amount of pain in the short run, but it could help the industry avoid falling into a “multi-year deep hole.” The costs of losing a few days or even a few weeks or months of income would ultimately be less than the costs of a pandemic that lasts years.
Responding to Kopardekar’s question about research needs, Otto pointed to biometrics. Can, for example, biometric technology be developed and implemented that detects people carrying a virus so that risk-reducing measures can be taken before they board the plane? Getting to this point will require research into more than just the technology of sensing, he said. It will be necessary to determine the most effective responses once a viral carrier is detected. A good deal of thought will need to be put into the privacy issues raised by such a technology.
Next, Kopardekar passed along a question from the audience: Given the importance of protecting the airline industry and the global economy from the next pandemic, will airline leaders be willing to implement long-term solutions, such as testing, exposure notification, contact tracing, and so on? “Yes, absolutely,” Pearce answered. This has been such a fundamental crisis in the industry, he explained, that everyone is looking for solutions leading to a much more resilient industry. However, he added that there are concerns about enacting policies that will be kept in place long past the time they are useful. As an example, he pointed to the policy implemented after 9/11 for passengers to take off their shoes when they pass through a security checkpoint. Sometimes, he observed, policies get put in place that add to hassle and costs, but never get removed even after they have outlived their usefulness.
Another audience question concerned the opportunities for collaboration between the air travel and technology industries to jumpstart the recovery in aviation. Otto responded that some of the projects he mentioned in his talk offered opportunities for such collaboration. Developing antimicrobial surfaces for use on commercial aircraft is one. Another is biometric screening technology.
The next audience question asked about public-private collaborations that could grow international travel, increase cargo revenues, and get new generations of young people interested in aerospace careers. Harback responded that collaborations aimed at developing rapid, efficient testing could help foster increased international travel. Otto addressed the third part of the question, saying that technology is going to play a major role in addressing COVID-related issues in air travel. It should be emphasized to young people interested in tech jobs that there is a bright future for such work in the aerospace industry.
Workshop planning committee chair John-Paul Clarke then asked the panelists to list the top three things they would like to see implemented in response to the pandemic. Otto responded with two: an international vaccine passport that people would carry in addition to their national passports and the development of rapid testing or biometric sensing that does not require special handling and could be a part of the security screening.
Pearce noted that health screening is causing congestion in today’s airports even with the reduced number of passengers, and this problem will only become more acute as passenger levels return to normal. He would like to see a more efficient way of screening passengers for COVID, whether it is a health passport or some sort of technology. Second, he said that airlines would benefit from changing the regulations to allow overseas equity as a way of easing their debt burden. Third, he suggested a rethinking of how infrastructure providers such as Nav Canada are structured and regulated. He noted that the actions of Nav Canada to increase its fees in response to the sharp decrease in demand was “a very strange inversion of normal economics.”
Harback answered that if she could “wave a magic wand” and make it happen, everyone around the world would have access to the vaccine if they wanted it. This is important to the future of air travel and is also important in its own right as an issue of equity. “I think it would be great if solutions would not leave anyone behind,” she said.
Kopardekar next passed along a question about whether all companies will recover at about the same rate or whether some are more likely to be left behind. Epstein answered that the recovery will definitely be different for parts of the industry. For example, the narrow-body market will recover more quickly than the wide-body market. As such, specialists in the wide-body market—such as Rolls Royce, which produce a lot of jet engines for wide-body aircraft—will likely take longer to feel the effects of the recovery than manufacturers who specialize in engines for narrow-body planes. Furthermore, the largest companies, such as Raytheon and Honeywell, will probably be fine as government support dries up. They are the tier 1 suppliers. However, the companies that supply them—the tier 2 suppliers—will probably be a little less fine. Things will be even harder down the line for the tier 3 and tier 4 suppliers. Another example, Epstein added, is that business aviation has been less affected by the pandemic than commercial aviation, so the manufacturers of business jets will recover more quickly than those who make commercial jets, and the same thing is true for companies in the supply chains for the business jets versus the commercial aircraft.
In response to a question about the just-in-time approach to manufacturing in the aerospace industry, Epstein predicted that “it will probably end up being a factor in a bumpy recovery in the supply chain, for better for worse.” No one who was running analyses or simulations of the just-in-time supply chain ever dreamed that the end markets—that is, the number of passengers flying on airlines—would go down by 60, 70, 80 percent or more. A drop of 20 percent was generally seen as the worst-case scenario. No one knows exactly what to expect, but having small backup inventories, as required in the just-in-time approach, could end up being disruptive as companies ramp up their production.
Pearce added that there is another aspect to this issue. Today’s supply chains are increasingly cross-border, with manufacturers getting parts from suppliers in many different countries around the world. Given the difficulties with and restrictions on international shipping in the face of the COVID pandemic—not just air cargo but also containerized cargo on ocean transports—it is challenging to have a smoothly functioning supply chain, whether it is just-in-time or not. This challenge may lead to a number of companies looking for suppliers closer to home.
Continuing the discussion, Otto suggested that companies will now think hard about the trade-offs involved with just-in-time manufacturing in the COVID era. The benefit of just-in-time manufacturing is in cash flow, as companies do not need to have as much cash tied up in their parts inventory. However, there are costs to the approach in terms of resiliency. There is probably no one-size-fits-all answer, Otto said, but manufacturing companies will all be thinking about finding the right balance between resiliency and the financial benefits of keeping a small inventory and using low-cost suppliers in other countries.
Manufacturers also have to worry about disruptions to their supply chains, Epstein added, and he offered an anecdote to illustrate his point. He was in discussion with a tier 3 or tier 4 company that made components that were sold up the supply chain. The company representative said that the company had contracted with an even smaller supplier that had gone out of business. “So, they have to go out and renegotiate the contract at a much higher price than with the previous multi-year contract,” he said, “and that squeezes them, and they have got to try to pass that up the chain. So, it gets tricky.”
In closing, Kopardekar asked what items would make sense to have in strategic reserves to help nations better deal with the next pandemic. Epstein said it is difficult to anticipate exactly what might be needed. Three years ago, for instance, no one would have predicted the shortage of masks that took place in 2020. Still, he continued, he would be disappointed if there are not people thinking carefully about this issue right now, for the answer could make a major difference in the response to the next crisis.
