Virus variants cast doubt on prospects for a vaccine-led recovery in 2021
In mid November last year, airline stocks staged a recovery as good news on the vaccine front started to break. Investors and airline management teams alike began to see the light at the end of the COVID tunnel, with prospects of a recovery in travel in time for the summer 2021 season looking like it could be within reach.
In the UK, the government held out the promise of a “return to normal life after Easter” and the industry had hopes that normal life would include being able to take that long delayed overseas trip. There is plenty of evidence of pent-up demand, so it is government restrictions that now stand in the way of the longed for recovery.
On the whole, the vaccine news has been good since then, at least in the UK.
Vaccination progress
The UK vaccination programme got off to a good start and by the 7th February, 12.3 million people had received at least their first jab, representing 18.4% of the population. The government seems on track to hit its target of vaccinating all of its highest risk population by the middle of February. Allowing a three-week period for immunity to develop, that suggests that from around the 8th March, the risks of hospitalisations and deaths should be much diminished.
The USA is not too far behind, with 10% of the population having received at least one shot, although the top performers have been Israel and the UAE.
Progress has been less impressive in the rest of Europe, with EU countries having decided to source their vaccine supplies collectively, a decision they probably now regret. The EU Commission has not covered itself in glory and supply constraints have meant that fewer than 3% of people in the EU have been vaccinated so far.
But with new vaccine supplies progressively coming on stream during the year, until recently vaccines appeared to offer the industry a relatively certain route out of the crisis. The main question for the industry seemed to be at what point in 2021 travel restrictions would be lifted.
The virus strikes back
However the path back to normality has had a big setback due to the emergence of troubling new variants of the virus, starting with the B.1.1.7 “Kent” variant discovered in the UK. In mid December, the UK government revealed that their tracking data showed that the new variant appeared to be spreading 30-70% faster than previous strains.
Other countries moved quickly to halt flights from the UK to avoid importing the new variant. With case numbers surging, the UK introduced a new national lockdown in a desperate attempt to prevent the health system being overwhelmed. This has brought UK aviation to a virtual halt again. Under the current lockdown restrictions, leisure travel overseas by UK citizens is actually illegal.
On the plus side, the lockdown has begun to bring case numbers down and it has been confirmed that the existing vaccines are effective against the new strain, suggesting that the plan to get on top of the variants currently circulating in the UK remains on track, albeit at considerable cost to the economy and to people’s daily lives.
UK case numbers. Source: coronavirus.data.gov.uk/details/cases
Enter E484K
However, more bad news has come from South Africa, where another troubling variant with the E484K mutation has rapidly become the predominant strain. It is as fast-spreading as the Kent variant, but evidence is also growing that the currently deployed vaccines are less effective against it.
That has prompted the UK to move to further close its borders, with hotel quarantines mandated from high risk countries. £10,000 fines for avoiding quarantine are to be imposed, together with prison sentences of up to 10 years for anyone caught concealing their arrival from a “red-list” country.
The industry had been hoping to see testing replace quarantines. But would-be travellers now face both pre-departure and post-arrival tests, combined with 10 days of guarded quarantine in an airport hotel, all of which have to be paid for by the traveller. The government just announced the mandatory hotel stay would cost travellers £1,750, a price tag that seems designed to act as an additional deterrent to travel.
Whilst the scientists are confident that the vaccines can be modified to be effective against the E484K mutation, it is likely to take until the Autumn before modified vaccines can even start to be deployed. Whatever border measures the UK takes in the short-term to protect itself against importing new variants, it is hard to see what logic would be used to justify relaxing them much before the end of the year.
UK aviation had been hoping to see a progressive relaxation of travel bans during 2021, with a real prospect of seeing a solid rebound in demand in the second half. It is now looking increasingly likely that 2021 will be no better than 2020. There is a possibility that it will actually be worse if the UK opts to try and “do a full Australia”.
The Australia option
Australia, like New Zealand, acted early to close itself off from the world to keep the virus out of the country. Widely regarded as a successful strategy, the main issue for Australia now is how and when to end the isolation. It seems likely that the intention is to wait until the pandemic has been brought under control globally. Quite when that would be is unclear, but I’ve heard reports that Australia may now be looking at keeping its borders closed until at least 2023.
Qantas may be in a position to survive such a long suspension of international travel, due to the size of the Australian domestic market. Before the crisis, Qantas earned about two thirds of their profit from domestic flights. Almost half of the rest came from its loyalty business, which is also very domestically oriented.
Source: Qantas investor presentation
But the same is not true for UK airlines. Measured by 2019 ASKs, the Australian domestic market is more than eight times the size of the UK domestic market.
Will this be a trigger for government assistance to UK airlines?
So far, the UK government has failed to come forward with any sector specific assistance for its airline industry, which is hugely dependent on international travel. Transport minister Grant Shapps has promised to deliver an aviation recovery plan “later this year”. But apparently it can’t be published “until we know where we are with the ending of coronavirus”.
Who knows how long that will take and how many UK airlines will still be around to participate in the recovery, when it eventually comes. With politicians queuing up to outcompete each other in their enthusiasm for killing off international travel, it is not clear that any of them care.
