After the pandemic, we’ll return to an airline industry that is very different

 American Airlines has suspended the flight of three-quarters of their long haul international flights.

Airlines are not new to experiencing significant demand shocks. It has survived the storms of the 9/11 attacks in 2001 and the SARS pandemic from 2002 to 2004.

We have not seen anything like this in a long time.

Read more: Grattan on Friday: We are now a nation in self-isolation

So, will the airline industry be able to handle this predicament? What role will and should the governments play? And, when all this is over, what will have changed for good?

There are many airlines that can’t exist as they are

Liquidity is the key to success, not just for airlines but also for most businesses. This means that money should be coming through the doors on a regular basis.

Extreme uncertainty can force a previously-solvent business into bankruptcy if it is unable to secure enough liquidity to cover current costs.

The airline industry has had a successful decade, with each of the past ten years ending in the black. However, the profit margins are low and the differences between carriers and regions remain high.

The cash reserves of most airlines are only enough to cover their fixed costs for a few months (costs which must be paid whether or not their planes fly).

Three Options

The spread of the disease suggests that we will continue to experience extreme disruption for several months.

The government will be forced to make hard decisions.

There are three main options.

• Let the struggling private airline fall
• Offer them liquid to help them weather the storm
• The Italian government has already done this with Alitalia

I anticipate governments will use (and abuse) all three. A significant number of smaller airlines (and possibly several mid-sized carriers) could be forced out of business.

Connectivity will be the main argument used to prevent airlines from failing.

The governments who choose to nationalize or bail out their carriers will emphasize this wider economic benefit.

Even if the airlines are weak, they may get some help.

Governments will likely give priority to larger carriers based on their ability to provide greater connectivity. Sometimes, this is done without considering the long-term viability of these companies.

Once the pandemic has passed, travelers will find that there are fewer airlines in operation and a more concentrated market. More of them will belong to the government.

Flight frequency may be reduced, and the planes could be more empty, depending on which fleet mix the remaining airlines use.

Read more: Is cruising still safe? Will I be insured? What you need to know about traveling during the coronavirus crisis

Whether prices will be higher or lower will depend on the interplay of demand and supply.

Lower fuel prices and fewer airlines would likely drive down airfares, but a global economic recession and lower demand would increase them.

Government support for smaller airlines may not be available. DAN PELED/AAP

Anyone can guess what the net result will be. I expect to accelerate the unbundling of products (food, beverages, baggage allowances, etc.) especially if the recovery is slow.

Not only airlines are affected, but I would also like to mention airports and aircraft manufacturers. As demand drops, airports, aircraft manufacturers and air navigation services providers will be under financial strain.

COVID-19 will put the civil aviation industry to the test. After the pandemic is over, at least for the first few months, and perhaps even years, travellers will find a new industry.