Airlines and Covid-19's stop-and-start recovery After eight months of curtailed service because of the coronavirus pandemic, airlines around the world are hurting - battling back against an evaporation of demand unlike anything they have faced in previous recessions. Overall industry capacity is down 57% from October 2019, and even the bright spot short- and mid-haul travel - remains down 46%. To cope with the uncertainty, carriers have had to adopt new strategies that let them move as quickly as the virus. In addition to slashing capacity, as carriers did early in the pandemic, their most recent moves involve adjusting their schedules, operations, and cost structures to capitalise on opportunities, minimise cash-burn, and remain agile enough to respond to a meaningful pick-up in demand. Until there is a vaccine widely available, survival will depend on how long carriers can tread water and how long their cash holds out. In an effort to avoid across-the-board cuts, airlines are also matching some of their costs to the volatile swings in demand. For instance, pilots and flight attendants have agreed to part-time contracts or reductions in guaranteed minimum wages - helping to reduce costs when not flying, while enabling airlines to scale up quickly as demand rebounds. They are also looking for opportunities to outsource functions at airports and headquarters, which can enhance flexibility. Airlines and airports have been teaming up to experiment with new ways to make passengers feel safe flying today. On-site Covid-19 testing is being tried at a growing number of airports, including London's Heathrow, and on US flights to Hawaii. Several nations are now requiring Covid tests, either administered upon arrival or through submission of recent results. But it is not just a fear of contracting the virus that is keeping people off planes. Would- be travellers also are worried about having trips cancelled at the last minute, or worse, getting stuck at some destination after testing positive for Covid. Government travel restrictions change frequently, adding to the anxiety. To combat this, some airlines are piloting insurance coverage for coronavirus-related disruption of trips. One of the more ambitious approaches is the creation of 'travel bubbles' - designated routes between a set of markets with low Covid case counts and testing programmes with low numbers of positives. These corridors of safety allow airlines to provide more assurance that trips will not be interrupted, and passengers will be safe end-to-end, and not just on the aircraft. The catch is that success depends on government policy and public compliance to keep the rate of infection at a modest level. ECN1034 ECONOMICS FOR BUSINESS 3 ECN1034/ Assignment (Q) / April 2022 Right now, airlines are understandably preoccupied with short-term survival, but they also need to plan for when demand finally returns. Once people are willing to fly, there is a chance that many carriers will find themselves unable to ramp up service fast enough. It could be because too many aircraft were taken out of service, or too many laid-off pilots and mechanics need recertification or found employment outside the industry. Airlines and governments must remember that decisions made today may have ramifications for the speed of the recovery. Source: Adapted from Forbes, 22 October 2020. 1 Identify, with examples in the aviation industry, the sources of revenues, fixed costs and variable costs. Comment on how each influences the financial position of most airlines during the pandemic. [8 marks] 2 Describe the characteristics of monopolistic competition. To what extent does the extract support the view that the aviation industry is monopolistically competitive? [10 marks] 3 Assuming all airlines operate in a perfectly competitive environment. Using appropriate diagrams, explain how a fall in the 'overall industry capacity' during the pandemic would affect the long-run equilibrium of a loss-making incumbent airline. [12 marks]