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News Article

Aviation Faces Worst Crisis in History

By Alicia Arizpe | Thu, 06/11/2020 - 13:13

Recent analysis indicate that the crisis in the aviation sector might be worse than expected. Regions with little governmental support, such as Latin America, might fare even worse than the average, according to industry associations.

After years of continuous growth, the aviation industry finds itself almost paralyzed in many regions in the world. The industry began to feel the effects from the sudden dry up in demand as early as March with the International Air Transport Association (IATA) reporting that the industry would lose up to US$113 billion in revenue in comparison to the previous year. However, an increasingly larger number of border closures and travel restrictions would further erase demand, leading the association to update its forecast three times, all for the worse. Earlier this week, IATA updated its economic forecast estimating that losses in revenue could climb up to US$419 billion, only to later correct it to US$434 billion.

Demand has plummeted across the globe, with IATA stating that at its lowest point it shrank by 95 percent during April. While the association explains that there are signs of a recovery ahead, demand is expected to continue being a fraction of what it was in 2019, well into 2021. The association expects that during 2020, demand measured in revenue passenger kilometers (RPK) will be only 54.7 percent of what it was last year.

Airlines are adjusting their operations to address the sharp reduction in demand, with measures ranging from grounding most of their fleets to large and widespread furloughs. Some have succumbed to pressure, most remarkable among those are LATAM Airlines and Avianca, Latin America’s two largest airlines. While Avianca had faced financial hurdles well before the outbreak, LATAM Airlines bankruptcy declaration was unexpected as the airline had reported a stable financial position not long before filing for Chapter 11. To explain the bankruptcy filing, Roberto Alvo, CEO of LATAM Airlines said that “LATAM entered the COVID-19 pandemic as a healthy and profitable airline group, yet exceptional circumstances have led to a collapse in global demand that has not only brought aviation to a virtual standstill, but has also changed the industry for the foreseeable future.”

Traffic has sharply reduced in Latin America, with the Latin American and Caribbean Air Transport Association (ALTA) reporting that airlines in the region transported 97.1 percent less passengers in April 2020, than that month in 2019. April 2020’s total 1.08 million passengers transported is a sharp contrast to April 2019’s 34.2 million passengers. While domestic flights showed a 95.2 percent reduction, the sharpest drops were in international flights both in the Latin American Region and abroad, with the first falling by 99.9 percent and the second by 98.7 percent.

While demand fell globally, Latin America is expected to be the second worst affected region during 2020 due to border closures that IATA described as “draconian.” The region is expected to see a 57.4 percent reduction in demand for 2020, only a bit less than Africa’s 58.5 percent reduction. Other regions are also expected to see much less demand, with Europe’s shrinking by 56.4 percent, Middle East’s by 56.1 percent, Asia Pacific’s by 53.8 percent and North America’s by 52.6 percent.

Airlines in Mexico have also been severely impacted. The country has not closed its borders nor restricted domestic or international travel but it has been impacted by border closures from other countries. Aeroméxico reported sharp drops in demand for April and May, with its latest report indicating that demand for May measured in RPK fell by 94.4 percent year-on-year for the month. That month Aeroméxico saw only 135,000 passengers, a 92.4 percent reduction in its year-on-year traffic. Local low-cost airlines faced a similar situation. Viva Aerobus reported that during May it had transported 88.2 percent less passengers in comparison to the previous year, while Volaris transported only 213,000 passengers that month, 88.9 percent less than in May 2019. The disappearing demand is expected to have deep consequences for airlines warns the National Chamber of Air Transport (CANAERO), which explained that the industry could lose up to US$6.4 billion during 2020.

Even though demand is disappearing fast, costs are not. IATA warns that while airlines’ expenses will be smaller this year, they will be offset by the 50 percent drop in revenue. The association expects that non-fuel costs will increase by 14.1 percent. Moreover, some airlines might be inclined to offer deals that get passengers back into the air, which is expected to add an 18 percent drop in passenger yields.

Although April was estimated to be the lowest point for the industry, recovery might be complex and delayed as airlines continue to ramp up public and private debt to pay fixed costs and salaries during this period. Moreover, social-distancing measures have greatly limited numerous economic activities, leading to a widespread recession that is expected to further decrease desire to travel. Global trade is also expected to drop by 13 percent due to the closure of non-essential manufacturing plants in many countries. All these troubles add to a hard 2020 and a bumpy path to recovery. “Financially, 2020 will go down as the worst year in the history of aviation. On average, every day of this year will add US$230 million to industry losses. In total, that is a loss of US$84.3 billion,” said Alexandre de Juniac, Director General and CEO of IATA.

Alicia Arizpe Alicia Arizpe Senior Writer