The below piece was written by Kevin Johnson, the head of our Transportation & Logistics group, as he reflects on the last twelve months and how the aviation industry has navigated the COVID-19 pandemic.
LOOKING BACK
The news reports of COVID-19 were in the air as airline executives and aircraft lessors began pouring into Austin, Texas. And as early as the poker tournament on Saturday night, February 29th, it was clear that things were different. Pre-registered players from Europe were no-shows for the game and the attendance was down as the conference began on Sunday night. The disease was a topic of conversation from the start.
Traders seemed to strike fewer deals, in part because uncertainty permeated every discussion. People were nervous. Trump had banned travel to China at the end of January and reports were filtering in about outbreaks in Italy and Spain. There were few or no masks at the conference, but perhaps some awkward and ineffective attempts at social distancing. As ISTAT was ending, the city of Austin should have been ramping up for South by Southwest®, the 34-year-old music, technology, and film festival that was the city’s major tourist draw every year. Instead, Austin announced that it was concerned about international travelers descending on the city and canceled the festival in its entirety.
South by Southwest® felt like the first domino falling. As I flew north a year ago today, word started filtering in about more and more conferences and events canceling and governors starting to announce travel restrictions. We were witnessing the shutdown of the hospitality industry and, with it, worldwide air travel, the lifeblood of our industry. By chance, I was flying back to Minneapolis and then driving straight north to a remote lake house where I would end up sheltering for several weeks. I kept thinking of a Robert Heinlein novel called Farnham’s Freehold which ends with the title character and his family driving hell-bent for the mountains as civilization was collapsing around them and the bombs were about to start falling.
TODAY – MARCH 5TH, 2021
Today, two and a half million are dead because of COVID-19, over 500,000 of them in the United States. But we went on.
The United States and global economies have changed in some expected and some completely unforeseen ways. Broadway, the Met Opera, and live entertainment everywhere just stopped when it became clear that performance was an excellent way to spread the virus; most remain dark today. Restaurants nationwide closed at first, then struggled to survive through take-out and delivery, resulting in many of our favorite dining places closing their doors forever, while many others have found ways to carry on through local support. While all of that could be readily anticipated, how many could have predicted massive toilet paper shortages or the exploding growth of video conferencing and remote work technologies? Phone usage may be forever altered as a result and the long-term impact on office space demand, or lack thereof, is still hard to fathom.
Besides the entertainment and restaurant industries, the travel industry was probably the hardest hit. Air carriers grounded most of their fleets and some went out of business altogether. While none of the major U.S. carriers have closed their doors, they consolidated their regional feeder carriers such that several have just closed shop. The downturn in travel rippled – nay flooded – downstream, impacting the vendors that support the industry at all levels. Leasing companies faced aircraft lease cancelations and struggled to find a balance between repossessing aircraft and restructuring with their customers. Aircraft financiers have taken a hit as the aircraft assets backing their investments have lost value and leases defaulted and the ABS market essentially closed to aviation transactions. Demand for delivery services spiked, sparking a search for freighter aircraft and cargo capacity that will continue for some time. Aircraft vendors such as MROs and ground handling companies have been squeezed along with the airlines, but those that have scraped by have had to learn new skills such as becoming experts in disinfection and remote inspection techniques.
It has been said that in 2021, hindsight (for the first time ever) is actually 2020. And in hindsight, the aviation industry in the U.S. has managed to survive 2020 for two primary reasons. First is the government aid that came in the form of the CARES Act, providing much-needed financial assistance. Second, however, is the tenacity of the industry, made up of scrappy and creative folks at all levels. Anyone who has helped hold the infrastructure of aviation together can take pride in the resilience and innovation needed to react to changes like they faced in 2020 and keep aircraft in the air despite the extreme changes and challenges.
LOOKING FORWARD
As March 2021 has arrived, there are many good reasons to be optimistic about the future, for the industry and otherwise. Psychologically, it is hard to overestimate the impact of spring coming to the Northern Hemisphere and the days are getting longer. People can feel (with some justification) that the long dark COVID-19 winter is coming to an end.
From a public health perspective, the U.S. has approved three vaccines for emergency use, and we have already vaccinated over 8% of the population in the United States. Further, President Biden has placed orders that are said to be sufficient to vaccinate every adult American by the end of May. The approved vaccines have also been astonishing in their performance when you consider that there have been more than 78 million doses given in the United States with no reported deaths and very few reported complications. The technology involved is truly impressive.
As a country, we may also see much-needed additional government assistance for people that have been hardest hit by the pandemic. And as those people see additional monies and maybe a freeing up of restrictions in months ahead, that money will be fed directly back into the economy.
From the travel industry perspective, there is anecdotal evidence to suggest that once the virus is under control, travel will rebound with a massive pent-up demand behind it. People are burning to go anywhere they can away from home. Hotels reservations are becoming booked up for popular locations and timeslots. Groups are tentatively starting to plan their next conferences, including ISTAT, which is tentatively scheduled to be in Austin again, November 14-16, 2021. Investors that are committed to the industry have also started to re-enter the market as certain large lessors have started issuing new bonds at historically low interest rates.
Does this mean we are out of the woods yet? Despite one or two over-eager states that think so, far from it. The U.S. having vaccinated 8% of its population means 92% of the population is still unserved. Further, less than 1% of the worldwide has been vaccinated so far. There are also the threats of multiple variations of the virus for which the approved vaccines may not be effective. Many things need to play out before public confidence returns and the airlines can start boarding their planes shoulder to shoulder again. The best-case scenario may be that traffic will recover significantly by year-end. Some conservative observers predict there will not be a full recovery until 2023.
What this means for the industry is that it still needs to continue to be diligent for the foreseeable future and probably not less than a year. If yours is a business that is just breaking even (or worse), you need to continue to jealously guard your cash until revenues recover. If you are plagued by unresolved business issues with vendors or partners that are sapping your energies or profits, you may need to take steps to deal with those so you can recover. Most of all, you need to continue doing the things that have helped you survive this pandemic economy so far. The end of the worst is perhaps in sight; just be sure you get there intact.
FMJ IS HERE FOR YOU
FMJ is dedicated to helping its clients succeed in good times and bad. How can we help you survive for the duration?
- We know things. FMJ’s attorneys have worked in almost every corner of the industry, from in-house with major airlines to leasing companies and hedge funds, from conversion facilities to ground handling companies, from MROs to travel agencies. If you are coming on an industry issue for the first time, we have probably seen it before and can help you navigate it.
- We know people. We take pride in our global connections and our ability to connect clients with each other, whether it is a willing buyer and a willing seller for an asset or assistance in jurisdictions where you may never have done business. If we don’t know the people you need, we likely know the people that know the right people and we can often assist in introducing you.
- We bring perspective. The COVID-19 pandemic is not the first global emergency to impact the industry and it will not be the last. FMJ takes the long view and we have seen our clients through the downturn of the great recession of 2008, through the lockdown of 9/11, and even Desert Storm when the flying public just stopped flying. We know the industry will recover and have worked through these issues before. We also can frequently bring a fresh view of a client’s knotty problems and find solutions and inroads that may be hard for someone in the middle of a crisis to see.
- We watch out for you. FMJ gets to know our clients’ businesses and we become invested in their success. When possible, we watch for trends that might disadvantage our clients and opportunities to help them advance. FMJ succeeds best by making sure its clients survive and succeed too.
If you need any assistance or want to discuss a particular issue affecting your business, please contact Kevin Johnson at kevin.johnson@fmjlaw.com or Bob Fafinski at robert.fafinski@fmjlaw.com.
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