Carriers and the disease: the airlines set for hard landings

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Hello and welcome to the intelligence on Economist Radio. I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. Among the Indian state of Kerala's 35 million people, there have been just a handful of deaths due to COVID 19, the secret, cheap, well known techniques applied early and a rock star health minister leading the efforts. And we visit the Irish pub scene in New York. It's quiet. Big changes were already underway before the pandemic hit. Now some may never reopen. But take heart, the demise of the Irish pub has been predicted many times before. First up though, the airline industry was one of the first to feel the impacts of the pandemic. In April this year, planes carried just 47 million passengers, a level of mobility that if annualized looks like numbers from 1978. Quiet skies have led to record losses for some carriers, for others to bailouts. But not Ryanair. Today the Irish low cost airline reported better than expected earnings for the year to the end of March.

It was a relatively good year where we saw our profit increase by 13% pre exceptional from 885 million to just over a billion euro.

But Neil Sorahan, the company's finance director, said the pain was still to come.

We think that we will lose approximately 200 million euro in the first quarter. And this is primarily down to the fact that we left flown about 150,000 passengers in that quarter, as compared to about 45 million of our targets, over 99% of our fleet grounded in the first quarter of this year.

Ryanair aims to return to 40% capacity in July and 60% by September, with face masks and temperature checks for passengers and crew. And how to lure customers back to the skies. As ever, with lower fares, we've got.

The lowest cost base of any airline in Europe, so we won't be found wanting when it comes to pricing. But there will definitely be the mother and father of all Farawars.

The eventual competition between bailed out state carriers and their cash rich, low cost cousins could fundamentally reshape the industry.

Well, this is a very interesting question at the moment.

Charles Reade writes about travel for the Economist.

Some people have said, oh, is this the end of low cost airlines? In that low cost airlines make money by squeezing people on their flights, by filling them almost completely full. Will that be allowed to continue? In a world of social distancing, we've.

Been quite clear no airline in the world will make a profit if they have to remove the middle seats on the aircraft. Social distancing is not something that can be exercised in a metal tube, be it the tube in London, the metro in Paris, a bus or an aircraft.

But if we look at the stock market, investors tell a different story. They think the big winners will be Ryanair and Wiz. This is partly because if we look at what's going on in Asia, it's more face masks and temperature checks which have come in, rather than keeping seats empty in these types of places which have emerged from lockdowns. It's also partly because if we look at the airlines with the lowest costs, those airlines are Ryanair and Wiz. And so these sorts of low cost airlines, well capitalised, with good balance sheets, very low costs, will be the survivors in this industry.

But another low cost airline that's been in the news is Norwegian, which does not look like it's going to come out of this a winner.

Now, Norwegian used to be the third largest low cost airline in Europe, but when it emerges, it won't be anywhere on the same size as it was last year. Even so, today the company's creditors will approve a deal in which they take control of 95% of the airline's shares. And that's an effort to meet the conditions of a state bailout from Norway. But this airline doesn't really plan on restarting flights outside Scandinavia until next year. And when it does, it will only be a fraction of the size that it was in the past. So low cost airlines with weak balance sheets will be a net loser from this.

And what about aside from the low cost carriers? What about the flag carriers and big but not low cost airlines and so on? I mean, is it going to be a situation of bailouts for those?

Do you think so? Yes. There's already been several big bailouts for flag carriers. In America, the full service carriers have already received more than $25 billion. In Europe, Air France, KLM has already had a bailout. Lufthansa is about to get one. However, many of these bailouts will come with conditions attached which are likely to mean that these airlines will emerge smaller coming out of the pandemic than they were going into them. For example, France and Austria have included conditions to reduce the amount of very short haul flying. Air France is no longer allowed to compete on routes against the state rail service, and that's tried to encourage people to take train rather than fly and therefore emit fewer carbon emissions. However, the airlines, which are neither flag carriers and are not seen as strategically important yet, are really going to suffer. So we've already seen some of these collapse. For example, flybe in Britain, a regional airline in Britain, which used to be Europe's largest regional airline, which went bankrupt a few months ago. And we'll see many of these, perhaps smaller, more niche carriers go bust. Virgin Atlantic may well be one of these. Not strategically important enough for a bailout, yet, not financially strong enough to survive.

But as regards bailouts, Ryanair in particular has called that kind of state aid illegal.

The irony of all of this is that the airlines that were the strongest coming into COVID 19, the likes of EasyJet, IAG ourselves, are the ones who are probably going to be the most disadvantaged coming out of it, as we'll be competing against flag carriers who've received bucket loads of illegal state aid to trade at below cost selling.

There is a certain political dimension to this whole notion of bailouts, right?

Yes. I mean, the European Commission has ruled that a lot of these aid packages aren't illegal state aid. Some companies, such as Ryanair, might challenge that and probably will challenge that in court. However, whether many of these subsidies will continue on an annual basis going forward as they did in previous decades is very much questionable in that there is a growing political coalition against airline subsidies and against bailouts. This is not simply from the usual suspects, such as economic liberals who believe in a fair playing a level playing field. For companies, not simply from fiscal conservatives who don't like spending money, but also from some very left leaning environmentalists saying that government should not spend their money on this, instead should spend their money.

Greening the economy and putting aside health and environmental angles on this. When people do at last decide to fly again, what will all of this mean?

So there's been a very interesting forecast put out by the Dollar Flight Club, which is an online travel website in America, and looking at what occurred after previous downturns in the aviation industry adjusted slightly for the greater scale of this downturn. They suggest that airline fares will fall 35% next year due to the fair war caused by people trying to gain market share and push weaker airlines out. And when weaker airlines do go bust or fall out the market, when there has been consolidation, forced and voluntary occur, they predict that there'll be a big jump in fares. So they predict that There'll be a 35% drop next year and then fares will double between next year and 2025. So if you want a cheap deal on holiday, perhaps braving the end of the pandemic next year is the way to do it, rather than waiting till 2025.

Charles, thank you very much for your time.

Well, thank you very much, Jason.

For a lot more analysis like this, subscribe to the economist. To get 12 issues for $12 or 12 pounds, just go to economist.com radiooffer. India extended its lockdown measures for an additional two weeks yesterday following a spike in coronavirus infections over the weekend. That's the fourth lockdown extension since it was first imposed in late March. Some restrictions have been eased, such as allowing sports matches to go ahead without spectators. Across India, the virus has infected more than 96,000 people and killed more than 3,000. But look closer and there's one state that has so far handled the challenge particularly well.

Kerala is a beautiful state. They call it God's own country. It's on the southwest coast of India.

Max Rodenbeck is our South Asia bureau Chief.

It's got 35 million people, but it's actually one of India's more prosperous states. I mean, its GDP per capita is about $3,000 a year, which is 60% more than the rest of India, although that still makes it about 10% of the GDP per capita of most Western European countries. But unlike a lot of Western countries, including, for example, UK Kerala has done a fantastic job of controlling the virus and bringing its numbers way, way down. So it's basically almost completely under control in Kerala right now. So to date Kerala has reported about 600 cases in all and so far just a handful of deaths.

And how have they managed to keep the numbers so low?

Any accounting should give a big, big place to the Minister of Health and Social Welfare in the state. KK Shelja.

Actually we are fighting a war against this pandemic to control it and to.

Tackle it, who has, you know, been fantastic sort of tower of energy in this whole thing. And she's a superhero status in, in Kerala. Although she's, you know, a modest looking person, a former science teacher, but she's a very, very hands on minister. And you know, some of some are now calling her the coronavirus slayer, the rock star health minister.

And so how did she sort of spring into action then when responding to coronavirus?

Well, she had put together a rapid response team as soon as they discovered that Covid was likely to arrive. So way back in January they were already at work on this. So they set up a control room for the whole state, got the medical officers in all 14 districts to sort of do the same at local level and sort of put forward a state plan according to WHO guidelines. You know, you test, you trace, you isolate. They followed the rules exactly. So that when the first case arrived in Kerala, which was the first case in India as well, on the 27th of January, directly from Wuhan, they were ready to greet incoming flight from Wuhan at the airport. And so, you know, disembarking passengers had their temperatures checked and three of them who happened to have fevers were isolated immediately in a nearby hospital and other passengers were quarantined at home until they could check on them. So they sort of arrested this right at the beginning by finding the people who were likely to be bringing the virus into the state.

And so she has guided the response to COVID19 since then with similar fervor.

Yeah, absolutely. I mean, to give a, you know, a sense of the, the scale at its peak back in, in mid April, they had something like 170,000 people under quarantine in Kerala under pretty strict surveillance and being looked over by visiting health workers. And you know, for example, people who didn't have an inside bathroom in their house were put in special sort of government isolation units. That number has gone way down from 170,000 to, to about 21,000 right now under sort of observation and isolation. But they also did contact tracing so that they actually had to recapture people who escaped quarantine. There were sort of manhunts across the state to make sure they got people, including some foreign Tourists who tried to sneak off and were grabbed and put under isolation. But all done very gently. I think in the end when they've got, they've put people in isolation instead of making it a coercive thing, they, they've actually looked after people very, very well. So that, you know, people who are in isolation have actually had free meals given to them. They can speak on the phone at any time with whoever they like. They can speak on the phone with state psychiatric people. If you have any problems, if you're simply lonely, there's someone to talk to. And so, I mean, in a nutshell, they've used the sort of cheap, simple tools of quarantine, contact tracing, curfews, and doing it early on and doing it aggressively. So I think that's the secret of success so far.

And so why do you think Kerala took that route? Why took it so seriously so early, so by the book, when so many other, well, other Indian states and certainly other countries haven't?

Well, I think you have to hand it to the professionalism and the leadership of people like KK Shailaja. You know, that's obviously a factor, but also it's the fact that Kerala has a long history of investing in public health. You know, it's been run by communist governments of one kind or another or left leaning governments since the 1950s. And right from the beginning there's been a big, big, big emphasis on public health. So that tells you a lot. But also they have the experience, and you know, Shailaja herself has the experience of dealing with a really kind of terrifying outbreak of a very dangerous virus, which was just two years ago, exactly two years ago. The Nipah virus, which like coronavirus, is a bat borne kind of pathogen, extremely contagious and really fatal. In fact, it's much, much more dangerous than Covid. It has a mortality rate of something like 75%, which is many, many times as fatal as Covid. When this wave of Nipah virus hit Kerala, 21 out of the 23 people infected died. But the state mounted a massive campaign, not much different from what it's done for Covid and actually got the Nipah virus contained within. So clearly these things were front in mind when Covid began.

So how do you see the story going forward? This is clearly not the end of the story. As lockdowns start to lift and people start to move.

Yeah, and there's worry about a second wave, a third wave. Of course, absolutely. And the thing is that, I mean, Kerala is very much connected with the rest of the world. And it has the highest number of expat workers of any state in India. Many of them work in the Gulf, the Arab Gulf countries. And because of the economic turndown there, many of those expat workers are coming back to Kerala. They're expecting an influx of perhaps 300,000 just in the next few weeks. And those are places that have been very badly hit by Covid. So they are extremely worried about the arrival of all these people. However, they are also taking precautions and expecting the wave and preparing for it. And unlike other countries which have actually closed their doors to the influx of their own people, if they fear Covid, Kerala is actually welcoming the return of these people. I'm pretty confident that Kerala will manage quite well, certainly better than most other states in India, and be able to keep on top of COVID in the future.

Max, thanks very much for your time.

Thanks, Jason. That was great.

Almost since the Irish began emigrating to New York City, there have been Irish pubs to greet them on the other side of the Atlantic.

My first night in New York City, I went into J.P. clarks and McLean Avenue and I came out with a place with a. A couple leads for jobs and an apartment.

Danny Price moved from Ireland's King County Offaly to New York City a decade ago. He's now the general manager of Murphy's and Jamison's Irish bars on Second Avenue.

You know, we're small time mom and pop operators week to week, basically.

He says the lockdown has been devastating.

You know, this has really driven us into no man's land. We don't know if we're going to be able to come out of it or how we're going to be able to come out of it.

The pandemic has exacerbated what was already a difficult situation for many pups.

The lockdown happened on the eve of St. Patrick's Day, which is, other than Christmas, the biggest moneymaker for pubs.

Rosemary Ward is an economist correspondent based in New York.

It was a really big deal for them to close. The ones with kitchens have the option of staying open for pickups and deliveries. One pub owner that I spoke with, Niall Henry, he is staying open for pickups and deliveries for first responders, and he has seen an 85 to 90% drop in revenue. He's just staying open just to sort of to help, not because he's making any money out of it. Other pub owners wonder if they'll ever reopen.

So was the Irish pub in good.

Form before COVID 19 hit the drinking Habits had changed. People were no longer going out for boozy lunches. And minimum wage increases had an impact. It went up $4 in recent years from 11 to $15. And at the same time, gentrification has had an impact on how much rent was costing. Even in neighborhoods not impacted by gentrification saw massive rent increases. One bar owner that I spoke with said that, you know, his rent was $60,000 a month. I mean, that's astronomical.

I guess there are a lot of those kinds of structural changes happening in cities all over the place. I mean, what were Irish pubs doing to kind of move with the times in New York?

Well, funnily enough, they were trying to be less Irish. One local pub chain offered more varied food and drink options. You know, you can't just go in for a pint of Guinness or Harp. You'll have options of craft beers and craft whiskeys, which is what people wanted. And they wanted more than just, you know, shepherd's pie and fish and chips. They want more varied food and healthier food options. So a lot of pubs were rejigging their menus and rejigging their, you know, less Diddley eye and shamrocks and wood and bars are becoming more modern, lighter, brighter. And they also were moving away from sports on big screens, which in itself was a way to attract punters, you know, in the last few decades. And they're now employing, you know, mixologists to make Prohibition era cocktails.

And so how does that trend then play into how you think things will go once pubs start to open up again?

I think the neighbourhood pub, the traditional Irish pub, probably will have a good chance of surviving because they probably have less overhead, they own their building, they have fewer staff. And some Irish pubs will lean into being Irish as a place of being a haven that they always were for the Irish community. They survived prohibition, which was a literal ban on drinking in public. Some switched gears altogether and, you know, became local supermarkets. Though I think there will be some form of Irish pub no matter what. People have predicted the death of the Irish pub since the 1970s and it's still around.

Rosemary, thank you very much for joining us.

Oh, thank you, Jason. Lovely chatting with you.

To follow all of the Economist's coverage of the COVID 19 pandemic and how it's swiftly reshaping the world, visit economist.com coronavirus that's all from us on the intelligence, if you like us, give us a rating on Apple podcasts and see you back here tomorrow.