How The Coronavirus Pandemic Will Reshape The US Airline Industry: Network Implications

It’s hard to see the light at the end of the tunnel for the airline industry right now. Unprecedented capacity cuts, employee furloughs, cash constraints and government aid in the wake of the COVID-19 pandemic are dominating the news. And rightly so – the staggering and sudden impact is unfathomable, and the situation continues to evolve every day. The cruel irony that the industry was recording all-time profits just weeks ago makes it even harder to digest.

But while it may be difficult to see right now, airlines will emerge and recover from this crisis, and this period of recovery will also be uncharted territory. The airlines that survive could emerge significantly smaller, with a depleted workforce and strained operations. But what will the revenue landscape look like? How will airlines need to re-build their commercial efforts and win back their customers? In a series of posts, I’ll discuss the post-COVID-19 environment from a commercial perspective. Let’s start with network implications.

The gradual recovery will be driven by a few factors. The reduced capacity of large domestic airlines and low-cost carriers, resulting from less routes and reduced frequencies, will be significant. Some of this capacity will eventually return because of the temporary suspension of slot rules that allow airlines to reclaim their slots, post-crisis. But given the impact severity, demand may be slow to return to normal and airlines will still be strapped for cash, so it’s likely that airlines will focus on the highest network value routes, at least to start.

One driver of reduced short-term capacity will be airlines’ decisions to retire old aircraft. Many airlines are already moving up the retirement dates of older aircraft and will not replace these aircraft in the near term, leading to a decrease in capacity. American Airlines, for example, is retiring its remaining 767-300ERs[CB1]  by May and is unlikely to back-fill that capacity in the near term. While the airline plans to retire more planes by the summer of 2021 at the latest, the likelihood that American (and others) retire more planes sooner is high.

Another driver of short-term capacity constraint will be the regional carriers. If some regional carriers shrink or don’t make it through this crisis, this will greatly impede airlines’ ability to re-deploy their previous capacity. For context, regional airlines account for more than 50% of departures for airlines like United and Delta. A significant drop in regional capacity will restrict airlines from re-introducing many short-haul, feeder and express/shuttle routes.

Re-introduction of capacity will also have a close link to individual cities and states, and their respective positions on the COVID-19 recovery curve. Low-risk cities that are past the virus peak will see more capacity re-introduction vs. medium or high-risk cities that recover later. This can have a material impact on individual airlines in the first few months depending on which cities re-open and at what rate.

In the long-term, some of these trends can have a lasting impact on the network structure that exists today. Besides the potential further consolidation of the industry (which we saw a flurry of after the financial crisis in 2009), airlines may have to make tough choices about where they fly and retention of slots. In the post-COVID world, what does the seat share out of long sought-after spoke markets look like? How will airlines re-think their strategy for shared hubs such as Los Angeles? How will low cost carriers tweak their networks? How will large international carriers capitalize on reduced U.S. carrier frequencies with non-stops to service markets with reduced domestic capacity?

There’s little doubt that the U.S. airlines’ networks will look different than they did before the pandemic. The question is how different in the short-term during recovery and eventually in steady state. The decisions airlines make in the 6 to 12 months post-crisis could lay the foundation of the U.S. airline network for the next decade.