Dismal 2021 in sight for airline industry as pandemic-induced crisis continues
October 28 2020 06:01 PM
A health worker waits for travelers to arrive at the Covid-19 test centre at Charles de Gaulle airpo
A health worker waits for travelers to arrive at the Covid-19 test centre at Charles de Gaulle airport, operated by Airport de Paris, in Roissy, France.

Beyond the Tarmac

The global airline industry’s prospects look dismal in 2021 with pandemic-induced crisis continuing, job losses mounting and economic devastation growing.

Total industry revenues in 2021 are expected to be down 46% compared to the 2019 figure of $838bn. The previous analysis was for 2021 revenues to be down around 29% compared to last year.

This, according to the International Air Transport Association, was based on expectations for a demand recovery commencing in the fourth quarter of 2020.

Recovery, however, has been delayed owing to new Covid-19 outbreaks, and government mandated travel restrictions including border closings and quarantine measures. IATA expects full year 2020 traffic to be down 66% compared to 2019, with December demand down 68%.

Around 60% of the world aircraft fleet is leased, IATA data reveal. While airlines have received some reductions from lessors, aircraft rental costs have dropped less than 10% over the past year.

Also, it is critical that airports and air navigation service providers avoid cost increases to fill gaps in budgets that are dependent on pre-crisis traffic levels. Infrastructure costs have fallen sharply because of fewer flights and passengers, the association said and noted infrastructure providers could cut costs, defer capital expenditures, borrow on capital markets to cover losses or seek government financial relief.

Aviation veteran Brian Pearce, who is IATA's chief economist, recently said at an online media briefing that fuel is the “only bright spot” with prices down 42% on 2019. But they are expected to rise next year as increased economic activity raises energy demand.

Without additional government financial relief, the median airline has just 8.5 months of cash remaining at current burn rates, pointing to the fact that they are struggling to stay airborne.

A new industry analysis has shown that the airline industry cannot slash costs sufficiently to neutralise severe cash burn to avoid bankruptcies and preserve jobs in 2021.

Unless governments act fast, some 1.3mn airline jobs are at risk, IATA cautions. And that would have a domino effect putting 3.5mn additional jobs in the aviation sector in jeopardy along with a total of 46mn people in the broader economy whose jobs are supported by aviation.

Certainly, labour is a major cost item in the airline industry. For this reason, the industry is currently seeing significant but unfortunate job loss announcements as airlines try to adjust the size of the workforce.

To maintain last year’s level of labor productivity (ASKs/employee), employment would need to be cut 40%. Further jobs losses or pay cuts would be required to bring unit labour costs down to the lowest point of recent years, a reduction of 52% from 2020 Q3 levels.

Industry experts say the loss of aviation connectivity will have a dramatic impact on global GDP, threatening $1.8tn in economic activity. Governments must take firm action to avert this impending economic and labour catastrophe.

“The fourth quarter of 2020 will be extremely difficult and there is little indication the first half of 2021 will be significantly better, so long as borders remain closed and/or arrival quarantines remain in place. Without additional government financial relief, the median airline has just 8.5 months of cash remaining at current burn rates. And we can’t cut costs fast enough to catch up with shrunken revenues,” Alexandre de Juniac, IATA’s director general and CEO noted at the online media briefing.

He said, “The handwriting is on the wall. For each day that the crisis continues, the potential for job losses and economic devastation grows. Unless governments act fast, millions of airline jobs are at risk around the world. They must step forward with additional financial relief measures. And they must use systematic Covid-19 testing to safely re-open borders without quarantine.”

De Juniac added, “There is little good news on the cost front in 2021. Even if we maximise our cost cutting, we still won’t have a financially sustainable industry in 2021.”

To survive, airlines will need to bring costs in line with revenues. Doing that looks like a difficult balancing act because airlines must also preserve the capability to be able to safely and efficiently ramp up operations when demand picks up.

As de Juniac emphasised, the ongoing crisis does not look like ending anytime soon. Some industry experts say they are looking at well beyond a year of severely depressed demand.

Therefore, the decisions taken in the next weeks and months to manage through the crisis will re-set aviation’s trajectory for several years to come.

* Pratap John is Business Editor at Gulf Times. Twitter handle: @PratapJohn

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