In business we often wish for a level playing field, a situation in which everyone has a fair and equal chance of succeeding. Unfortunately, that is not generally the case and normally one party will have an benefit over another – imagine home advantage in the sports fixture. In travel terms the analogy is especially pertinent with varied legislation from one country to the next benefiting some more than others.
In the airline sector many argue that unfair subsidies destroy competition. This has formed the basis of many international disagreements over such actions threatening the sector’s stability. Industry veteran William (Bill) Franke, the managing partner of airline investment vehicle Indigo Partners, believes the current Covid-19 crisis epitomises the level playing field debate with the world not evenly divided with respect to government assistance to airlines.
Indigo Partners sees that directly within its group of airlines which includes a controlling interest in US LCC Frontier Airlines and Chilean LCC JetSmart, as well as holding stakes in Mexican budget airline Volaris and Central and Eastern European low-cost specialist Wizz Air. Frontier is getting assistance from the US government in the form of payroll grants and potentially a direct loan, but others have not enjoyed as much support.
During CAPA – Centre for Aviation’s fourth online CAPA Masterclass webinar, Mr Franke highlighted that in the US there is an overarching view of the need to protect the airline sector from the standpoint that it is a public necessity. However, in Europe, he stated that countries were tending to be protective of their own domestic airlines (for example, Lufthansa in Germany and Air France in France). That approach “defies gravity from the standpoint of trying to have airlines be successful and properly positioned in the market place”, he said.
There will be some airlines that will encounter financial difficulties without government support, said Mr Franke, which is just a fact of life, but he believes it is useless to try to predict who will and won’t survive. It is all a function of an airline’s local market, local government support, and passenger support for that particular airline, he stated.
In respect of Indigo Partners’ own airline interests, Mr Franke said that as the Covid-19 crisis appeared more quickly than anyone anticipated, the airlines immediately had to focus on cash burn and measuring reserves and the expenditure against a forecasted impact timeline.
“In our case, we made the assumption just out of lack of knowledge that 85% of an airline might be on the ground for up to a year, and on that basis, we tried to calculate cash burn against cash availability and position the airlines for survival”, he explained.
The reality may be a little different. Mr Franke’s own expectation is that until there is a treatment or vaccine available for Covid-19, “we’re all going to be dealing with waves of events”, and that leads to a question of when revenue will rebound to a standard that permits breakeven cash flow. “If you’re running an airline today you want to have cash against your objective of when you will be able to have load factors of 50% to 60%, which should provide you with breakeven cash flow, and that needs to be the first objective”, he said.
To complement this another pressing issue is ensuring that passengers feel safe to travel and that is a complex mix of factors that extends far beyond any airline’s control to the very start and very end of the travel journey and which requires wider collaboration and coordination.
While it is clear there will be some marketplace changes as airlines work to adapt to a post Covid-19 reality, Mr Franke remains bullish on the resiliency of the ULCC model. In fact Indigo Partners is being opportunistic during the current crisis, parenting with Oaktree Capital Management to make a bid for Virgin Australia, which voluntarily sought restructuring last month. Mr Franke characterised Australia as a very interesting market, with a competitive duopoly between Qantas and Virgin Australia.
LEARN MORE… You can hear more from Mr Franke in the recording of the CAPA Masterclass session from May-2020. Click here or on the image below to view the recording.