What Is Going On With the Global Airline Industry?By Carlos Robles | Tue, 08/10/2021 - 12:58
The global airline industry has been heavily impacted by the COVID-19 pandemic. In 2019, the industry registered a historical peak in passenger volume. Demand was at its best in years. Then the pandemic hit. In one year, we have moved from stopping almost every commercial flight in the world to a recovery that is still weak, with many challenges and scenarios that nobody saw coming. Airlines have adapted their operations to improve safety standards but factors outside their control, such as vaccination rates, new outbreaks, government aversion to risk and even perception among passengers, are influencing the pace of the recovery.
The worst point of the impact of COVID-19 on airline profitability was in the second quarter of 2020, when operating losses totaled more than 70 percent of revenues. Cost-cutting and a strong cargo business helped reduce losses in the second half of the year. However, many airline costs are fixed over short periods and hard to avoid. As a result, losses were reduced only to around 50 percent of revenues by the last quarter of 2020. In normal times the scale of this revenue shock and the resulting operating losses would have caused widespread airline bankruptcies. There have been some, but not many. That’s because governments have stepped in and provided support, either through direct loans or as credit. This has kept much of the industry alive, albeit on life support, despite the scale of cash burn.
Financial performance is not going to improve or stabilize soon due to difficulties in controlling the virus variants and slower vaccination rates in some regions. According to the International Air Transport Association (IATA), the surge in virus cases, travel restrictions and vaccination delays has lowered Revenue Passenger Kilometers (RPK). International RPKs started the year at 14 percent of pre-crisis levels versus the 24 percent average in 2020. With vaccinations allowing some European and North America and a few other markets to open in the second half of 2021, IATA forecasts a rise to 34 percent of pre-crisis levels. But the average for 2021 implies zero international air travel growth over 2020. Domestic RPKs will be much better, driven by buoyant economic growth (revised up to 5.2 percent from 4.9 percent), accumulated savings among consumers, pent-up demand and the lack of travel restrictions within borders. The forecast shows a 48 percent annual average rise over 2020, taking domestic RPKs in the second half of this year to 96 percent of pre-crisis levels. As a result, we can conclude that financial performance for airlines is directly related for now to regions with large domestic markets.
One segment that has helped airlines survive has been cargo activities. Cargo remains a very strong business for airlines in 2021, with the strong economy and restocking driving an increase in world trade. Yields are also expected to remain elevated due to the slow return of hold capacity from the widebody passenger fleet. Cargo revenues are forecast to rise to US$152 billion from US$140 billion, representing one-third of the industry’s revenues. Pre-crisis cargo represented only 10-15 percent of the typical airline business in comparison, according to IATA. Supply chain conditions remain favorable, with low inventories-to-sales ratios, resilient demand for goods and more affordable air cargo compared to container shipping, all combining to make air cargo a competitive mode of transport. Besides, the shift in consumer spending from goods to services has so far not been as strong as feared.
Are people willing to travel? The answer likely depends on economics and cultural characteristics but the recent UEFA European Football Championship provided some data and trends. Eleven European cities hosted the EURO 2020 tournament, which was postponed from last year due to extensive lockdowns across Europe related to the pandemic. IATA data shows that looking at the bookings during EURO 2016, net ticket sales for travel during the event were similar to the number of passengers traveling one month before the event. However, bookings to this year’s host cities followed a different trend. During the event, there was a 40 percent increase in net ticket sales compared to the same period a month before the event. It is evident that major sports events are catalysts for air travel and once the travel restrictions are lifted, people are eager to travel.
Meanwhile Mexico was downgraded by the US Federal Aviation Administration (FAA) to category 2. As a result, airlines have no chance of adding routes from Mexico to US. That is important at any time but more so now that the airlines are depending on passenger volumes to survive. Mexico was the most connected country in the Latin America and Caribbean region in 2019, followed by Brazil. Mexico’s connectivity has grown at a significant rate of 58 percent over the five-year period from 2014 to 2019. A combination of strong catch-up growth in living standards and a young and fast-growing population in Mexico are forecast to generate the seventh-largest addition of domestic passengers and, with the US, the fifth-largest addition for a country-pair.
We need to recover our category standing with the FAA to cope with that expectation and market demand. The air transport sector supports jobs for 278,000 people in Mexico at airlines, airport operators, airport on-site enterprises (restaurants and retail), aircraft manufacturers and air navigation service providers. In addition, by buying goods and services from local suppliers, the sector supported another 345,000 jobs. On top of this, the sector is estimated to support a further 122,000 jobs through the wages it pays its employees, some or all of which are subsequently spent on consumer goods and services. Foreign tourists arriving by air to Mexico, who spend their money in the local economy, are estimated to support an additional 667,000 jobs. In total, more than 1.4 million jobs are supported by air transport and tourists arriving by air. We should take care of that industry, don’t you think?
According to IATA, the air transport industry, including airlines, and its supply chain are estimated to support US$24.1 million of GDP in Mexico. Spending by foreign tourists supports a further US $13.3 billion of the country’s GDP, totaling US$37.4 billion. In total, 3.5 percent of the country’s GDP is supported by inputs to the air transport sector and foreign tourists arriving by air. Our links with North America are undeniable, both culturally and commercially. That is reflected in North America’s standing as the largest market for passenger flows to and from Mexico, followed by Latin America and Europe. In total, 60.4 million passengers arrived from North America (91.2 percent), 3.2 million passengers arrived from Latin America (4.8 percent) and 2.3 million passengers arrived from Europe (3.4 percent).
As mentioned, the current market and economic environments are challenging, to say the least, for airlines globally. There is ray of hope coming from vaccines, economic recoveries and the willingness of people to travel but, at the same time, there have been setbacks caused by new waves and variants of the virus and the risk aversion of countries to open their borders. All in all, cargo activities represent a good avenue for the industry to catch up and governments need to continue issuing financial aid. The sector is really important for Mexico, particularly in relation to activities tied to tourism. Although the country has been too relaxed by not stopping arrivals from other countries, there is a notorious lack of support for airlines, airport infrastructure and tourism activities. Sadly, our government does not understand the industry’s potential and its importance to the economy. Coming from that viewpoint, it will be very difficult, if not impossible, to get help.