How does coronavirus impact air travel? Will the halt in flights affect climate change? Find out from our air transport expert

Our lives have changed with the coronavirus crisis. But have they changed forever? In Does This Change Everything? European Investment Bank experts examine the implications of the COVID-19 crisis for sectors from education and digitalisation to urban mobility and medicine—and for your everyday life.

To find out what coronavirus means for airline travel, we spoke to Doramas Calderon, lead economist in the Air, Maritime and Innovative Transport Division at the European Investment Bank, the EU Bank.

Read Does This Change Everything? from the European Investment Bank, the EU bank. Subscribe to the podcast on iTunes, Acast, PlayerFM and Spotify 

The airline industry has been among the hardest hit by the Coronavirus pandemic. How’s that going to change the future of air transport?

It is certainly a dramatic, very important crisis, a downturn, a stop for the industry. However, I don’t think that the coronavirus pandemic will change the aviation industry. This cyclical industry has had many downturns over the years and is likely to continue so. This abrupt and deep crisis is financially putting air transport under unprecedented strain, but will not change the industry itself. It will have a smaller effect on the way the industry operates than 9/11. Then, airline fleets were also grounded. Moreover, the aviation industry itself was the vehicle for the terrorists’ attacks. That led to some changes in the industry, geared towards improving security. The European Investment Bank activity over the last few years has financed the upgraded safety and security infrastructure and equipment that the industry has today. We did many aircraft acquisition projects at the time; airlines needed some additional security equipment on board; and airports increased security, including baggage and passenger scanning and all the civil works to prepare for these upgrades. Today safety and security upgrades continue to be a big part of our business. But at this stage I don’t see COVID changing the way the industry operates in the long term.

How does this crisis affect air transport and how does that differ from 9/11?

Covid is unlikely to change the way the industry operates, but the downturn is proving to be much more severe this time than in 2001. After 9/11 aircraft were grounded for about a week. Now most of the fleets have already been  grounded for weeks and we don’t know yet  how much longer this will last and how rapid the re-entry into activity will be. Airlines need to maintain and support aircraft on the ground, including some critical staff.  But once activities ramp up hundreds of thousands of people will need to be brought back into operation. The big difference is that we don’t know how long this is going to last. The effects on the cash flows  of the industry are truly dramatic. In this sense it is a more protracted, longer-lasting  downturn than 9/11. At that time, the crisis coincided with other external shocks like the bursting of the dotcom bubble in 2000 and, shortly after, the build up to the second Gulf War during 2002 and the actual war in 2003, affecting both air travel demand and the price of oil, critical to the aviation industry. These were  knock-on effects that made the downturn worse. But this time the coronavirus not only is grounding the aviation industry for longer, but also severely disrupts the economy at large, which will in turn have a knock-on effect on air transport. A severe economic downturn will substantially affect demand for air transport even once aircraft can fly again. The traffic build-up afterwards may not be as quick. There’s still a lot to be seen. These are truly  very difficult times. The bright spot this time is airfreight. Increased online shopping means more air cargo traffic. Also, the industry is playing a crucial role in shipping medical supplies across the world at a life-saving speed that would not be possible by any other means. I hear that some passenger planes are now flying as freighters. But airfreight is a small segment compared to passenger flights.

If airlines go bankrupt, will we accelerate the shift to a low-carbon economy? In other words, are coronavirus and climate action interconnected?

I think they are not interconnected.  Some airlines have already gone bankrupt, perhaps most will go eventually without government help. Governments are ramping up financial assistance programs for the sector. In any case, the coronavirus and 9/11 are time-determined shocks—say one, two, three years. Then the industry will go back to more or less normal. Instead, climate change is a different story, a much longer-term structural issue for the way the industry operates, bringing rapid change over say 20, 30, 40 years. Airlines have very efficiently started to incorporate the price of carbon into the cost of passenger tickets. More will be done. Next year we’ll see the integration of CORSIA, the UN-sponsored plan to offset carbon emissions, incorporating carbon offsetting into the cost structure of the industry. In Europe, we have the Emission Trading Scheme where the industry was included a few years ago. The effect of all this is to make passengers pay for the cost of carbon emissions. This will cause a slowdown in growth in the industry, and will increasingly incentivise the shift to cleaner aircraft. Burning as little fuel as possible is something that airlines have been keen on for a long time. The industry paid great attention to that following the oil shocks of the 1970s. Airlines have a strong incentive to lower fuel consumption and, therefore, emissions. The inclusion of the price of carbon into the ticket price has accelerated that incentive. In Europe, air transport’s usual annual growth rate had been of 3% to 4% on average. Because of climate change, this trend will come down 1.5% to 2%.

What new products or approaches might be needed in air transport to cope with the effects of the coronavirus crisis? How can the European Investment Bank, the EU Bank, help?

In the short term, coronavirus is putting an unprecedented strain on the cash flow across the value chain of aviation: the airline, airport, traffic management, and aircraft manufacturing industries.  The European Investment Bank operates through lending to finance capital expenditure. The continuation of this activity and our availability is part of the solution. But I’m afraid this is not the whole story. While grounded the industry cannot generate cash, cannot repay its debt and cannot remunerate its own equity. If we were to base everything on increased debt or leveraging up the balance sheet on a sector that is already quite significantly leveraged, there will have to be something additional to lending—for instance, some  assistance on the equity side via grants, via capital injection, which the authorities and industry are intensely discussing now. The European Investment Bank is available and we continue to disburse loans that have been recently approved. We continue to appraise new projects and assist our clients. This is part of helping the industry get through these terrible times. But the aviation industry will emerge from this and will continue to play its role of bringing the world together.

Read Does This Change Everything? from the European Investment Bank, the EU bank. Subscribe to the podcast on iTunes, Acast and Spotify.