Recovery, Profitability of Airlines Post COVID-19

Recovering from COVID-19 economic meltdown to the struggle with high price of aviation fuel due to the Ukrainian war, the International Air Transport Association, has expressed hope that the desire to travel and the removal of last travel restrictions will propel airlines to bounce back to profitability, writes Chinedu Eze

At the unveiling of the 78th Annual General Meeting (AGM) and World Air Transport Summit on Monday in Doha, Qatar, the International Air Transport Association (IATA), said the measures put in place by airlines and governments would speed up the recovery of the air transport sector and make airlines profitable again, after the devastating effect of COVID-19 pandemic and the current impediment, the Ukrainian-Russian war, which has led to the spiral of oil prices in the international market.

In projecting its outlook for the airline industry in 2022 financial performance, IATA stated that the industry losses are expected to reduce to -$9.7 billion (improved from the October 2021 forecast for an $11.6 billion loss) for a net loss margin of -1.2 per cent, which is a huge improvement from losses of $137.7 billion (-36.0 per cent net margin) in 2020 and $42.1 billion (-8.3 per cent net margin) in 2021. 

Industry-wide profitability in 2023 appears within reach with North America already expected to deliver an $8.8 billion profit in 2022, adding that efficiency gains and improving yields are helping airlines to reduce losses even with rising labor and fuel costs (the latter driven by over 40 per cent increase in the world oil price and a widening crack spread this year).

IATA also said that industry optimism and commitment to emissions reductions are evident in the expected net delivery of over 1,200 aircraft in 2022, noting that strong pent-up demand, the lifting of travel restrictions in most markets, low unemployment in most countries, and expanded personal savings are fueling a resurgence in demand that would see passenger numbers reach 83 per cent of pre-pandemic levels in 2022.

It noted that despite economic challenges, cargo volumes are expected to set a record high of 68.4 million tonnes in 2022.

“Airlines are resilient. People are flying in ever greater numbers. And cargo is performing well against a backdrop of growing economic uncertainty. Losses will be cut to $9.7 billion this year and profitability is on the horizon for 2023. It is a time for optimism, even if there are still challenges on costs, particularly fuel, and some lingering restrictions in a few key markets,” said IATA’s Director General, Willie Walsh.

Airlines’ Progress

IATA said airlines’ revenues are rising as COVID-19 restrictions ease and people return to travel, stating that the challenge for 2022 is to keep costs under control.

“The reduction in losses is the result of hard work to keep costs under control as the industry ramps up. The improvement in the financial outlook comes from holding costs to a 44 per cent increase while revenues increased 55 per cent. As the industry returns to more normal levels of production and with high fuel costs likely to stay for a while, profitability will depend on continued cost control. And that encompasses the value chain. Our suppliers, including airports and air navigation service providers, need to be as focused on controlling costs as their customers to support the industry’s recovery,” said Walsh.

IATA disclosed that Industry revenues are expected to reach $782 billion (+54.5 per cent in 2021), 93.3 per cent of 2019 levels. Flights operated in 2022 are expected to total 33.8 million, which is 86.9 per cent of 2019 levels (38.9 million flights).

“Passenger revenues are expected to account for $498 billion of industry revenues, more than double the $239 billion generated in 2021. Scheduled passenger numbers are expected to reach 3.8 billion, with revenue passenger kilometers (RPKs) growing 97.6 per cent compared with 2021, reaching 82.4 per cent of 2019 traffic. As pent-up demand is released with the easing of travel restrictions, yields are expected to rise 5.6 per cent. That follows a yield evolution of -9.1 percent in 2020 and +3.8 percent in 2021,” Walsh added. 

IATA said that cargo revenue is expected to account for $191 billion of industry revenues. That is down slightly from the $204 billion recorded in 2021, but nearly double the $100 billion achieved in 2019. Overall, the industry is expected to carry over 68 million tonnes of cargo in 2022, which is a record high. As the trading environment softens slightly, cargo yields are expected to fall 10.4 per cent compared with 2021. That only partially reverses the yield increases of 52.5 per cent in 2020 and 24.2 per cent in 2021.

Expenses

According to IATA, overall expenses are expected to rise to $796 billion. That is a 44 per cent increase on 2021, which reflects both the costs of supporting larger operations and the cost of inflation in some key items. These include fuel: At $192 billion, fuel is the industry’s largest cost item in 2022 (24 per cent of overall costs, up from 19 per cent in 2021). This is based on an expected average price for Brent crude of $101.2/barrel and $125.5 for jet kerosene. Airlines are expected to consume 321billion liters of fuel in 2022 compared with the 359 billion liters consumed in 2019.

“War in Ukraine is keeping prices for Brent crude oil high. Nonetheless, fuel will account for about a quarter of costs in 2022. A particular feature of this year’s fuel market is the high spread between crude and jet fuel prices. This jet crack spread remains well above historical norms, mostly owing to capacity constraints at refineries. Under-investments in this area could mean that the spread remains elevated into 2023. At the same time, high oil and fuel prices are likely to see airlines improve their fuel efficiency—both through the use of more efficient aircraft and through operational decisions,” Walsh said.

IATA said labour is the second highest operational cost item for airlines, noting that direct employment in the sector is expected to reach 2.7 million, up 4.3 per cent on 2021 as the industry rebuilds from the significant decline in activity in 2020. Employment is still, however, somewhat below the 2.93 million jobs in 2019 and is expected to remain below this level for some time. Unit labor costs are expected to be 12.2-cents/available tonne kilometer (ATK) in 2022, which is essentially backto 2019 levels when it was 12.3 cents/ATK.

IATA also said the time required to recruit, train, complete security / background checks, and perform other necessary processes before staff are “job-ready” is presenting a challenge for the industry in 2022, remarking that in some cases, employment delays may act as a constraint on an airline’s ability to meet passenger demand. 

“In countries where the economic recovery from the pandemic has been swift and the unemployment rate is low, tight labor markets and skill shortages are likely to contribute to upward pressure on wages. The industry’s wage bill is expected to reach $173 billion in 2022, up 7.9 per cent in 2021, and disproportionate to the 4.3 per cent increase in total jobs.”

Other Factors

IATA observed that the global macroeconomic backdrop is critical for the industry outlook, stating that the forecast incorporates an assumption for solid global GDP growth of 3.4 per cent in 2022, down from the strong 5.8 per cent rebound last year. It disclosed that inflation has risen and is expected to remain elevated throughout 2022, waning over the course of 2023, adding that while nominal interest rates are rising, real interest rates are expected to remain low or negative for a sustained period.  

Challenges 

IATA identified challenges that might mar the projections, which include war in Ukraine, saying, “The impact of the war in Ukraine on aviation pales compared with the unfolding humanitarian tragedy. The outlook assumes that the war in Ukraine will not escalate beyond its borders. Among the many negative impacts of an escalation for aviation, rising fuel costs and a dampening demand due to lowered consumer sentiment would be paramount.

This would also affect passenger throughput, as IATA said that combined, the Russian international market, Ukraine, Belarus, and Moldova accounted for 2.3 per cent of global traffic in 2021. In addition, about 7 per cent of international passenger traffic (RPK) would normally transit Russian airspace (2021 data), which is now closed to many operators, mostly on long-haul routes between Asia and Europe or North America, adding that there are significantly higher costs for re-routing for those carriers affected.

In the area of cargo, IATA said that just under 1 per cent of global freight traffic originated in or is transited through Russia and Ukraine, noting that the greater impact is in the specialised area of heavy-weight cargo where Russia and Ukraine are the market leaders, and the corresponding capacity loss would be difficult to replace, adding that about 19 per cent of international cargo shipments (CTKs) transits through Russian airspace (2021 data), remarking that carriers impacted by sanctions face higher costs for re-routing.

Inflation and Exchange Rate

IATA frowned at the fact that interest rates are rising as central banks combat inflation. 

“Aside from those carrying debt (who will see inflation devaluing their debts), inflation is harmful and has the economic dampening effect of a tax by reducing purchasing power. There is downside risk to this outlook should inflation continue to rise, and central banks continue to hike interest rates. 

“Moreover, the record strength of the US dollar, if it continues, will have a negative impact as a strong US dollar is growth dampening in general. It increases the local-currency price of all USD-denominated debt, and adds to the burden of paying for USD-denominated fuel imports as well,” IATA stated.

Response to COVID-19

IATA said that the underlying demand for travel is strong, but government responses to COVID-19 tended to ignore World Health Organisation advice that border closures are not an effective means of controlling the spread of a virus. The outlook assumes that strong and growing population immunity to COVID-19 means there will not be a repeat of these policy mistakes. There is, however, downside risk should governments return to knee-jerk border-closing responses to future outbreaks.

“Governments must have learned their lessons from the COVID-19 crisis. Border closures create economic pain but deliver little in terms of controlling the spread of the virus. With high levels of population immunity, advanced treatment methods, and surveillance procedures, the risks of COVID-19 can be managed. At present, there are no circumstances where the human and economic costs of further COVID-19 border closures could be justified,” said Walsh.

IATA also noted that China’s domestic market alone accounted for about 10 per cent of global traffic in 2019. This outlook assumes a gradual easing of COVID-19 restrictions in the second half of 2022. An earlier move away from China’s zero COVID policy would, of course, improve the outlook for the industry. 

“A prolonged implementation of the COVID-19 policy will continue to depress the world’s second largest domestic market and wreak havoc with global supply chains,” IATA noted.