Insight: Monday 1 February 2021: How Deep will the Second Wave Be?

Our US airline performance index (updated in our morning call each day) combines passenger activity, flights, and load factor data to provide a comparative performance statistic using 2019 levels as a baseline. We’re seeing a mild downturn again in late January of 2021. The question for us is whether the new strains and potential additional lockdowns will further depress the industry, or if vaccinations will result in a more rapid turnaround in performance in 2021. With 45.9 million vaccine doses distributed and 25.9 administered, the US is well on the way to immunizing a majority of citizens at most risk within the next 90 days. Combined with the spring weather, the impact of the pandemic and influenza season should wane, and we would expect a return to more normal conditions by late April or early May. Until then, however, we may see continued restrictions as two apparently more contagious strains of the virus have emerged, and traffic levels have dropped as restrictions in some areas have been tightened and fear of the disease has reduced travel demand. The chart below illustrates US airline traffic, with our lines illustrating trends over key periods. We remain concerned about the first two quarters of 2021, especially given the recent downturn and the first day with under 500,000 passengers since July of last year. The sudden downturn indicates a potential short-term downturn until vaccination and herd immunity can defeat the pandemic. While no one knows with certainty what will happen, we expect the following. First, we expect additional restrictions under the Biden administration during the first few months of his term. Politically, he needs to be seen as different from Trump and taking more draconian actions against the virus, and the travel industry economy may be the result. Already proposals to require Covid-19 testing prior to domestic flights have been floated, and so far, rejected. But such restrictions would have a crippling impact on the airline industry, and secondarily on the entire aerospace supply chain if enacted. While we don’t expect more draconian measures, we do expect window dressing from the Biden administration. With a major push for vaccination, we expect that recognition and lifting of restrictions from those vaccinated will occur before summer, likely with proof of vaccination. Applications are already in the works that are essentially vaccination passports, which could also be used for domestic flights. When I first began international travel in the 1960s, we used to carry yellow-colored vaccination cards with our passports. With this pandemic, the old system is likely to be revived with new technology. We expect this technology to become available in the 2nd quarter of 2021, likely a version sponsored by the World Economic Forum that is currently in testing. This “vaccine passport” on a cell phone will provide the basis for international travel as well as entry into sporting events and other crowded facilities until the pandemic wanes and herd immunity is achieved. Once that system is in place, international travel between countries with heavily vaccinated populations may begin to resume during the summer. While we do not expect a massive recovery in international travel in 2021, this should set the stage for a return to a more normal situation in 2022. A potential impediment is the relatively widespread distrust of the rapidly developed Covid-19 vaccines, which were approved on a substantially reduced time frame and without as widespread clinical trials, and have been approved on an emergency rather than normal basis. The reluctance to accept the vaccination could result in additional cases, with herd immunity gained through natural resistance rather than pharmaceutical immunization. We expect a slow return to “normalcy” in the US domestic market, with a return to about 75% of 2019 traffic levels by October, and 90% by the second quarter of 2022. Internationally, our expectations are for a return to 50% of traffic levels by October, and 60% by the second quarter of 2020, as the patchwork quilt of restrictions begins to be unwound. While the news is somewhat encouraging, we will have a couple of tough quarters to get through before things turn for the better for our industry.

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