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On airlines: Near-term drop off may translate to longer-term challenges

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      By Cheryl WilsonESG Senior Research Analyst, Calvert Research and Management

      Washington -- Airlines are likely to be among the hardest-hit businesses by COVID-19 due to government-imposed global travel restrictions and lower consumer demand as the result of social distancing. Bloomberg data indicates a substantial drop in global passenger revenue kilometers in the early months of 2020, and airlines are canceling thousands of passenger flights daily. The International Air Transport Association estimates global passenger airlines could lose more than $250 billion in revenue in 2020.1 In the US, after the 2001 terrorist attacks, the number of available passenger airline seats took four years to recover as airlines slowly reintroduced idled capacity2, and the ongoing nature of the pandemic could stretch demand recovery even longer.

      While government support via loans, tax breaks or other measures may backstop airlines in the near term, longer-term performance may be impacted by how companies manage workforces through the downturn, as well as carbon risks moving forward.

      Fuel and labor are the largest costs for airlines, and significant cost-cutting is needed to bridge this period of substantially reduced demand. Most airlines have announced schedule reductions and recruitment freezes, and some have also committed to executive compensation cuts, but layoffs are nevertheless likely across the global industry. A US government stimulus package announced on March 25 would directly support some worker wages while limiting allowable layoffs for months.3 Airlines in other regions may be wise to maximize the use of government aid, voluntary leave or temporary layoffs while maintaining benefits, so that when demand returns and capacity increases are needed to boost revenue, rehiring and retraining are not material barriers. Airlines have faced global pilot shortages in recent years, and while a downturn reduces this pressure, it is likely to return when demand recovers. Carriers will want to maintain good relationships with pilot unions, too: Prior to the COVID-19 pandemic, passenger air travel was growing in most markets, putting unions in strong negotiating positions with airlines. A number of US airlines have begun or soon may begin negotiations on new pilot contracts.

      Although carbon emissions plans will take a back seat while airlines grapple with the current operating environment, cost-cutting will also likely include a suspension of capex for fleets, which may impact airlines' carbon emissions - and costs to contain emissions - in the long run. New aircraft can be 15%-20% more fuel-efficient than prior models, and reducing the average age of fleets is a leading strategy for improving the intensity of carbon emissions.

      Eighty-one countries4, representing about 76% of international flights, have agreed to a carbon reduction program as of mid-2019 (the International Civil Aviation Organization's Carbon Offsetting and Reduction Scheme for International Aviation), which aims to hold net emissions from international flights steady at average 2019-20 levels. While voluntary until later this decade, airlines have few options for trimming emissions, and compliance is likely to rely on both newer aircraft and the purchase of carbon offsets. Compliance may also be stressed by the emissions baseline in the program - passenger aircraft emissions will likely fall in 2020, setting a lower benchmark than expected for compliance and increasing the gap that airlines may have to fill with offsets if demand recovers.

      Bottom line: While job cuts are not preferable, particularly in an industry facing labor shortages for some positions, cost-cutting is necessary for airlines. Companies that take a longer-term view and preserve positive relationships with employees via strategies such as temporary layoffs that maintain benefits are likely to outperform when demand recovers and airlines need to ramp operations.