Up until the COVID-19 recession came up, the 2008 crisis was the greatest economic disaster the world economy had ever faced after the Great Depression of 1929. But now it has been dethroned by the latest recession, which has been christened the Great Lockdown by economists. In this context, it is essential that we learn from the mistakes that we committed the last time, to ensure that we don’t repeat those mistakes again.

So, what are some of the lessons that we can learn from the 2008 recession that will put us in a better position to deal with this depression? What are some of the similarities and differences between the two phenomena? In this article, we shall analyse both the events.

The Causes

While the 2008 recession is such a major historical event, not many people know how it came to be, and what the causes were for the recession. The 2008 recession was caused mainly by human error and greed. Because interest rates fell to around 1% in the US in the early years of the 21^st century, bankers started lending money to people to buy houses. Several of these loans were given to subprime borrowers, who were people who had a higher risk of defaulting because they did not have much assets, incomes, or any other means to repay them. In addition to that, bankers also started collecting these mortgage loans in piles called Collateralized Debt Obligations (CDOs) and started trading them. They were given a very high credit rating because it was assumed that no one would default on their mortgages.

However, when interest rates went back up again, most people couldn’t afford to pay their mortgages, and so they defaulted. And the market failed and crashed. Several investment banks went out of business, and huge fiscal policies were enacted by most countries around the world to prevent the world economic system from collapsing. Real estate prices plummeted, and they haven’t come back to old levels ever since.

However, while the 2008 recession was caused by human greed and error, the COVID-19 recession is not. As the name suggests, the recession is caused by the global pandemic that has claimed around 4 hundred thousand lives till date. The economic recession was brought on by the panic selling induced by the imposition of lockdowns in several countries around the world. As several countries banned business activities in their domiciles to enforce social distancing and keep people safe from the virus, people panicked and became fearful for the safety of these companies, thereby triggering a huge fall in stock prices.

Using Stock Options

One of the major differences that many people fail to notice between the 2008 recession and 2020 recession is the prevalence of stock options. For those who may not be aware of what stock options are, they function in more or less the same way as futures, except they’re optional. For example, if I think that a particular stock price will go up in the future, I can buy a call option. Suppose the stock price is $40 right now. I can buy a call option for $40 with an expiration date of a month. After two weeks, if the stock price goes up to $50, I can then call in my option and buy the stock for $40. Then, I sell it for $50 in the market and make a $10 profit. Like any other derivative, the value of a call option depends on the underlying stock or security that it depends on. Therefore, they’re a very good way to be able to hedge your bets in the market.

While options trading was not very common in 2008, with the advent of technology in 2020 it has become a very preferable means of protecting oneself from the volatility that is a major part of the stock market in these troubled times. Therefore, such options can be used instead of outright selling the stocks, and this would definitely help reduce the sudden changes in the market, thereby stabilising the market to some extent and avoiding a recession.

The Boon and Bane of Technology

Technology has changed exponentially since 2008. While we only had the first iPhone prototype in the last recession, today almost anything can be done through technology, and this applies to finance as well. Gone are the day where you needed to call your broker to make transactions, now you can trade stocks on your phone with just a click of your fingers. While this has certainly improved the efficiency of the stock market, it can also lead to several problems and issues, especially during recession.

Higher accessibility means that people are much more likely to panic and hit the sell button at the slightest signs of problems, and that they are less likely to consult their brokers before making such a decision. Another major factor to be considered in this regard is FOMO: Fear Of Missing Out. Most people are so fearful of missing out on trends in the market that they tend to make decisions impulsively, and do not think their trades through.

The FOMO has also been compounded due to the prevalence of rumors and fake news in the market, that is waiting as a trap to lull unsuspecting investors. Sometimes, even prominent financial personalities indulge in such rumor-mongering. A notable example of this is Bill Ackman, a hedge fund owner who gave an interview to CNBC in March about the pandemic where he said, “Hell is coming.” This led to a huge panic in the market and people scrambled to sell their shares, until it turned out that Bill was actually shorting most of the stocks in the market, and that he made a fortune when the share prices fell. Incidents like these prove how rumors and news are sometimes manufactured by financial analysts for their own personal gain, and hence one must be wary of such information.

While the 2008 Great Recession and the 2020 Great Lockdown might not have much in common, there are definitely a few things that we can learn from our past mistakes in order to be able to efficiently get through this recession without much of a loss.

Richard Branson is known to have quoted that the easiest way to become a millionaire is to start with a billion dollars and set up an airline. The airline market in India has taken quite a hit during the times of the COVID-19 due to flight suspensions all over the world, but this downtrend had already started a long time ago.

The airline industry in general is looked upon as a very unprofitable industry by several investors, both in India and abroad. Whether it is Richard Branson or Warren Buffet, they all seem to have a very negative outlook on the industry as a whole. However, figures have shown that individual mobility has been going up exponentially over the years, which means that new and cheaper means of transports will soon be required. But will those new means of transports be airlines? Can they survive these tumultuous times?

At this stage, it becomes important to analyse some of the important problems that the Indian airline industry is facing, and this analysis has been done below:

Low Demand 

While India has often been called the largest market for airlines, and this has also been backed by numbers and predictions, this demand is now reducing. In 2018, the International Aviation and Tourism Authority had predicted that India would become the third largest aviation market in the world by 2024, with double digit growth in both the demand for airline tickets and the actual air traffic.

While this prediction held true for 2018, and there was a 18.9% growth, this came down in 2019 with only a 5.1% increase in air traffic. With the suspension of flights for the better part of the first half of 2020, this number is expected to go down further this year, thereby compounding the problem even further.

Governmental Regulations

The regulations by the Indian government have also harmed the airline industry. Most of these have been brought on by parliamentarians who have, at best, a very limited understanding of the airline business. This is evident from the fact that despite no clear evidence of any price manipulations or collusions, politicians have been trying to reduce airline prices even further by setting ceilings.

And this is despite the fact that several airlines have gone bust in the past few years, including Jet Airways and Kingfisher Airlines. Not to mention that Air India is in severe loss, and is currently running only on taxpayer’s money.

Another major regulation that was earlier causing a wide variety of problems but has since been scrapped was the 5/20 rule. Under this, any domestic airline had to be operational for at least 5 years and have 20+ aircraft before they could begin international flights. However, recently the rule was scrapped and replaced by the 0/20 rule, wherein airlines only now need 20+ aircraft to start.

Low Profitability

 For airlines, or any other business to survive and thrive, profitability is the key requirement. And this profitability is being threatened by a variety of different factors, the first of which is the compulsory cap that has been placed on ticket prices of flights under 500 kilometres or 1 hour. The tickets for these flights have been capped at $20 only, making such routes unattractive for most airlines. Not to mention the bad airport infrastructure in most areas, and the lack of capacity of the airports to deal with increased flight volumes has also hampered the ability of the airlines to remain profitable while still ferrying customers to a variety of destinations.

Perhaps the greatest blow to airlines across the country was the recent hike in airline fuel prices. Recently in June 2020, the Indian Oil Corporation announced a 50% increase in the prices of Airline Turbine Fuels (ATF), thereby pushing up cost of operations even further for the airlines, and cutting into their profit margins. Several industry leaders, including Nishant Pitti, who is the CEO of EaseMyTrip have spoken out against the rise, saying, “Airline industry has got no relief from the government in this crisis and now the ATF price hike only adds to our woes.”

Research has shown that over 63% of residents of the United States prefer to travel by car instead of by plane. Despite the longer time, they find it too be more convenient, cheaper, and most importantly, comfortable. Due to the coronavirus and the rapidly increasing difficulties that are being faced by the Indian airlines as well as those who regularly use these airlines, this trend might come to India as well. Already there has been a shift in the preferred vehicle of Indians for personal mobility over the years. More and more Indians are opting for cars and two-wheelers over buses and trains, and this does not bode well for the shared transportation sector.

Thus, the airline industry is in a bit of a tough spot at present, and based on how the government and other stakeholders react, it could go either way. On one hand, commercial flight sales are declining due to fear of the virus, on the other hand, chartered flights are becoming more and more popular among the rich as a means of safe international travel during these times. It remains to be seen which path the industry will take.