Many airlines in the global industry remain in a fragile financial state and will struggle to survive the harsh winter months, which are typically off-season business-wise, unless a faster pace of recovery is seen in air travel than what it is today.
A recent industry estimate has shown a median airline will not survive even the next six months at the current rate of cash burn.
Many airlines, though not in all regions, have survived so far and had their cash balances boosted by government aid, which totalled $161bn worldwide by early September, according to the International Air Transport Association.
Of course, airlines have also slashed costs to reduce cash burn. A smaller number of airlines also raised cash on the capital markets by issuing debt or equity and selling assets, points out IATA, the global body of airlines. Consequently, there is a group of airlines who have large cash balances that would last a long time, even at the second quarter (Q2) 2020 rate of cash burn. However, most airlines do not have this buffer, the association says.
Air travel has fallen on hard days since the onset of the coronavirus pandemic six months ago, with the number of travellers dropping significantly around the world.
Covid-19 has decimated air travel globally. Airlines worldwide have been largely grounded since mid-March.
The pandemic caused commercial air travel to come to a standstill for several months, and it is now at only a fraction of 2019 demand!
Financially, 2020 will go down as the worst year in the history of aviation. Globally, airlines are expected to lose $84.3bn this year.
And the situation is not improving either. In fact, in many cases it is going in the wrong direction.
IATA predicted in late July that global air travel won’t recover from the pandemic until 2024, a year later than its previous projection.
According to ‘airlines financial monitor’, carriers in all regions reported sharp decline in passenger revenues as the groundings affected the whole industry in Q2. Passenger revenues in IATA sample of airlines declined year-on year by 89% in Q2 2020.
Asia-Pacific airlines performed relatively better than other regions with the support of recovery in China domestic market. On the other hand, cargo revenues were strong as demand for time-sensitive shipments was alive. Carriers in some regions converted passenger aircraft to cargo aircraft to benefit from this.
However, this was not enough to compensate the decline in the belly capacity, and yields remained high. Airlines focused on cutting operating costs in this unusual business environment.
As the decline in fuel expenses and other variable costs were not enough to offset the revenue loss, airlines took initiatives to reduce labour costs and discretionary spending.
Airlines also took various measures such as voluntary unpaid leaves to reduce employee costs, but overall year-on-year decline in operating costs was limited to 52% vs 79% decline in operating revenues.
Many global airlines have also been deferring aircraft deliveries for 2020 to limit cash burn. They have been negotiating with manufacturers to defer their aircraft deliveries for this year amidst still-weak air travel demand.
In January, carriers had scheduled delivery of approximately 2,000 new aircraft for 2020. Eight months later, the number of deliveries plunged by almost 60%, to nearly 830. Overall, there were about 22,300 commercial fleet in service at the end of August, up nearly 8,600 from April, but still significantly below the 2019 average (28,900). About 30% of commercial aircraft still remains in the storage.
“The crisis in demand continued with little respite in July. With essentially four in five air travellers staying home, the industry remains largely paralysed. Governments reopening and then closing borders or removing and then re-imposing quarantines does not give many consumers confidence to make travel plans, nor airlines to rebuild schedules,” said Alexandre de Juniac, IATA’s director-general and CEO.
Facing an industry loss of $84.3bn this year, a 50% cut in revenues and high fixed costs for aircraft and labour, the financial viability of many airlines is in question. Government relief has been a critical lifeline.
But what relief has been given is quickly running out. Government measures to provide additional financial buffers against failure will be critical, and these must not increase already ballooning debt levels.
“Many airlines will not have the financial means to survive an indefinite shutdown that, for many, already exceeds a half-year. In these extraordinary times, governments will need to continue with financial and other relief measures to the greatest extent possible. It’s a solid investment in the recovery because each airline job saved, supports 24 in the broader economy. And a functioning airline industry will be a critical enabler for economies to regain their full power,” points out de Juniac.
* Pratap John is Business Editor at Gulf Times. Twitter handle: @PratapJohn
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