Airlines are facing the worst downturn in the history of aviation as countries continue to restrict air travel to halt the spread of Covid-19. Unless such restrictions are eased, a recovery in the fortunes of airlines will not occur. But when travellers can take to the skies again, low-cost carriers (LCCs) are poised to rebound quicker compared to full-service carriers (FSCs), says Campbell Wilson, CEO of Scoot.
For one, LCCs by their definition offer lower air fares compared to FSCs. And they are point-to-point operators. Hence, they do not rely on hub aggregation, says Wilson. Moreover, LCCs usually carry leisure travellers rather than corporate and business travellers, he adds.
Also, LCCs tend to operate regional flights rather than intercontinental flights. Such flights are closer to home and are within the tolerable risk perception of the average traveller, which is shaped by familiarity, household budgets and annual leave, says Wilson.
“So, I think for all of those reasons, I feel that the LCC model is probably going to recover faster and more strongly than perhaps the full-service model,” Wilson says in a Scoot keynote session at the CAPA Australia Pacific 2020 Aviation Summit on Sept 2.
For now, though, many airlines will have to dig deep and wait it out. This is more so the case for Scoot, which does not have a domestic market and is entirely reliant on foreign flights.
Its operating statistics are currently weak. In July, the airline’s passenger carriage declined 99.6% y-o-y on the back of a contraction in capacity of 97.1%. This led to a passenger load factor of just 12.6%, compared to 86.9% a year ago.
Wilson says the governments are facing the challenge to open borders given that national interests are at stake. This is largely influenced by how much their economies are dependent on trade and tourism, which in turn, is a function of “familiarity” and geographic proximity, he says. Ultimately, it is about trust. Hence, “we are going to see neighbours open up [more] to each other”, he adds.
That has so far been the case for Singapore. The city state implemented a fast lane travel with China, its biggest trading partner, on June 8. It subsequently implemented a reciprocal green lane and periodic commuting arrangement with Malaysia on Aug 17. Singapore has also allowed general travel to Brunei and New Zealand on Sept 1. More recently, it announced a fast lane arrangement with South Korea that will begin on Sept 4.
As for Scoot, it has resumed flights to seven more destinations in the Philippines, Taiwan, Japan and Indonesia. This is on top of existing flights to other destinations in these countries, as well as destinations in other countries and territories such as Malaysia, Hong Kong, South Korea and Australia.
Wilson acknowledges that a vaccine will help to pave the way for air travel to resume in a big way but it is not going to be a “silver bullet”. The way he sees it, the deployment or effective, cheap and rapid testing is a quicker solution to initiate a recovery in the aviation sector. He notes that Heathrow Airport is currently undergoing some testing trials. “We are certainly watching with interest and keeping our fingers crossed,” he says.
Meanwhile, Scoot can find financial support from the backing of Temasek Holdings, given that it is a subsidiary of Singapore Airlines (SIA). The national flag carrier — led by Temasek — had earlier this year raised $8.8 billion from a rights issue. SIA has so far used $4.4 billion of the proceeds for operating expenditure, aircraft acquisitions and debt servicing, leaving a remainder of $4.4 billion. This should bode well for Scoot since any airline that is majority-held by the government is in a strong position to survive the aviation downturn, says Wilson.
Scoot’s cargo activity has also been somewhat of a bright spot. In July, the airline’s cargo load factor (CLF) was 26.5 percentage points higher y-o-y. But this came on the back of a y-o-y capacity contraction of 60.9% that outpaced the 43.1% decline in cargo traffic. Wilson says although cargo activity is “helpful” to cover variable costs, it “doesn’t really move the needle” for Scoot. Eventually, the return of passenger activity is still needed to keep the carrier flying high.
