Translated Nov.10th, 2020.
Preface: Is a million dollar a big amount?
Operated no destination flights, retailed in-flight supplies, even opened fried dough stands, international carriers try every possible attempt to mediate cash burn caused by flights toboggan. While in domestic market, under a stability rising economy, load factor has fully recovered with a lower pair fare. Airlines profitability is at good shape: take Xiamen Airlines for an example, an 800-million profit was earnt in third quarter, only 17.9% lower year-on-year, giving a positive signal. So, in terms of international airlines, are those fancy attempts for self-saving effective? How’s the domestic market looks like compared to a month ago? This article briefly follows on the previous analysis framework ( Will They Folllow?) for data update, and tries to illustrate the misunderstanding of “popularity” and “effectiveness” with the scale of aviation industry.
A. Follow-up analysis.
Based on the findings presented in previous article, China’s domestic market achieved 8% year-on-year growth in capacity, but there is a long way for air fare. The number is 13% in October, placing it at the top of the world rankings, nearly 5 million ASK ahead of American market (the latter being amid a 45% year-on-year decline, slightly better than September’s 48%). In terms of take-offs and landings, the peak in single-day has reached the average for the same period in 2019. In the international market, there is still a significant gap. According to International Air Transport Association, the global ASK (available seat kilometers) declined by 78.8% year-on-year, while the value in China is significantly lower, only at 10% of the same period last year. Unlike the domestic market, whose recovery is spontaneous and fast, the international market is facing more resistance. Although the Civil Aviation Administration of China has relaxed the restriction, the full-scale recovery is still out-of-reach under current circumstances.
B. “Popularity” and “Effectiveness”
The three examples given at the beginning of this article are among the best known of self-help tactics given by airlines. Qantas flied two no destination flights around the continent’s well-known sites, Thai Airways opened fried dough stand in Bangkok attracted attention from media, but how are those attempts performed financially? Based on available data, the popularity of these tactics far outweighs their effectiveness, far beyond. For example, a Thai Airways-operated fried dough stand brings in an additional 10 million baht (2 million RMB) per month for the airline. But is 10 million really a big number for the airline? For an A350-941, one month’s turnover from the stand would cover 9.16 days of depreciation cost (base rent for an A350 is $990,000/month). For the Chinese domestic market, one quarter’s business volume is equivalent to only two and a half days of revenue (seat-kilometer revenue: RMB 0.5/seat-kilometer). For Cathay Pacific, it takes only 5.45 hours to lose half a year’s turnover (Cathay Pacific lost HK$9.9 billion in the first half of the year).
Same logic applies to the other two. No destination flights are similar to short-haul international flights in peak seasons, but single-digit takeoffs have little effect on the whole market: solely for Beijing—Singapore, 21 flights per weeks were implemented in pre-pandemic period.
Just like four months ago during the “seasonal tickets” craze, when all available seats for that public relation campaign accounted for only 2% of total capacity (previous postings), the attention brought by these recent “surprising survival skills” clearly outweighs the actual effect. But for many readers, the effectiveness of these survival skills far outweighed airlines’ cost-cutting attempts (layoffs, fleet reductions, union negotiations, etc.). These “self-helps” did signal a “positive response to the Pandemic.” Confidence in the market was quickly restored as both the media and the airlines have adopted an emotional approach to portray the benefits concretely, while spending little ink on passive but effective measures, i.e. cost-cutting. According to IATA, that’s the “only effective means in long run.”
While it is good for the media to show a positive side and thus boost market confidence, this way is blind and possibly misleading. Slogans, campaigns, and symbolic groundbreaking alone will not solve the problem; the impact of the epidemic on the airline industry is far-reaching. As an industry insider, the best thing to do is to contribute your own part, work towards a better future, and face the challenges optimistically. As an outsider, on the other hand, one should be wary of excessive optimism and try to quantify the problem. Being proud of the industry is a good thing, but try not make it hubris.
Overall, China’s domestic market experienced a rapid recovery in October, capacity has been achieved on a year-on-year rise, air fares are also higher than previous months. The international market has picked up somewhat with the relaxation of the “fusing” policy, but due to the constraints of the “double negative testing,” it will maintain a slow but steady increase, while it is difficult to achieve a year-on-year recovery under the current policy. It is difficult to balance popularity and effectiveness in airlines’ recent attempts. Cost-cutting should be on the agenda as soon as possible as carriers will soon face continued supply shocks and the upcoming shoulder and off-peak seasons. When trying to understand policies and measures, it is better to think about the logic and scale of the problem and analyze the market and trends quantitatively, in addition to gaining an emotional understanding from media and other sources.