A challenging outlook for airlines remains despite positive vaccine progress

It is no surprise to learn that 2020 was the worst year in history for air travel demand. Traffic data from International Air Transport Association (IATA) shows that demand (revenue passenger kilometres or RPKs) fell by -65.9% compared to the full year of 2019, by far the sharpest traffic decline in aviation history.

International passenger demand in 2020 was -75.6% below 2019 levels. Capacity, (measured in available seat kilometres or ASKs) declined -68.1% and load factor fell 19.2 percentage points to 62.8%. Domestic demand in 2020 was down -48.8% compared to 2019. Capacity contracted by -35.7% and load factor dropped 17 percentage points to 66.6%.

“Last year was a catastrophe. There is no other way to describe it,” says Alexandre de Juniac, IATA’s director general and CEO.

What little recovery we saw over the northern hemisphere summer season stalled in autumn and the situation turned dramatically worse over the year-end holiday season, as more severe travel restrictions were imposed in the face of new outbreaks and new strains of COVID-19.

In fact forward bookings have been falling sharply and continue a downward trend since late Dec-2020. IATA reports that bookings for future travel made in Jan-2021 were down -70% compared to a year-ago, putting further pressure on airline cash positions and potentially impacting the timing of the expected recovery.

IATA’s baseline forecast for 2021 is for a +50.4% improvement on 2020 demand that would bring the industry to 50.6% of 2019 levels. While this view remains unchanged, it warns there is a severe downside risk if more severe travel restrictions in response to new variants persist. Should such a scenario materialise, demand improvement could be limited to just 13% over 2020 levels, leaving the industry at 38% of 2019 levels.

Any optimism that the arrival and initial distribution of vaccines would lead to a prompt and orderly restoration in global air travel “have been dashed,” says Mr de Juniac, in the face of new outbreaks and new mutations of the disease. “The world is more locked down today than at virtually any point in the past 12 months and passengers face a bewildering array of rapidly changing and globally uncoordinated travel restrictions,” he says.

But, there will be a turning point in this crisis and it’s important that we are all prepared for it. “I don’t think that anyone foresees a world free from COVID-19 anytime soon. Certainly not in the next months or even within this year. But our ability to manage the risk is increasing as more people get vaccinated and testing capacity expands,” says Mr de Juniac.

“Eventually, we will be at a point where these and other measures give governments the reassurance that the risk of re-starting our lives—including travel—is tolerable, recognizing also the significant social and economic benefits that are at stake,” he notes.

At the Jan-2021 edition of CAPA Live – a monthly virtual summit, offering insights, information, data and live interviews with airline CEOs and industry executives across a next-gen virtual event platform – IATA’s chief economist, Brian Pearce, presented an industry outlook, entitled ‘COVID-19: challenging outlook for airlines, despite vaccine progress’.

Positively, he identified “we’ve seen in a number of cases that whenever travel restrictions have been relaxed there has been a surge of bookings, particularly for VFR and leisure travel”. This illustrates that there is true pent up demand” for air travel, but he acknowledged that the air travel industry is looking at “a multi year recovery, rather than a recovery within several months”.

Right now airline forward bookings are weakening despite the positive vaccine news. The increasing forward bookings trend which rose on vaccine news was reversed at the end of 2020, with a marked decline from 23-Dec-2020 onwards, according to IATA’s data. Forward bookings indicate a weak 1Q2021, said Mr Pearce, ahead of any vaccine boost being seen later in the year, with bookings down more than -80% year-on-year across Feb-2021 and Mar-2021.

The industry recovery will be weighed down by the very weak start to the year. “If we look at what’s been happening over the last six months, what started in the summer as a recovery in global air travel completely stalled”, adding: “after the August COVID-19 numbers, we’ve just seen global passenger kilometres flown flatlining, and indeed there’s been some deterioration,” he explained.

Mr Pearce noted “the consequence for average 2021 outcomes, growth outcomes in particular, is going to be weighed down by the very weak start to the year”. He explained: “We’ve found that the control of the virus was much more difficult than had been expected in the summer, outside of Asia, and we’ve seen this very severe second wave in Europe and a very severe third wave in North America, which has caused travel restrictions to be reimposed. This of course stopped the recovery we saw in air travel and has meant such a weak start to this year”.

There is hope though and the “transition from cash burn in the airline industry to cash generation is now in sight,” said Mr Pearce, but he acknowledged “it might not arrive before the end of this year, and I think we do have a very difficult three to six months ahead of us because of travel restrictions”. The economist believes cash burn is going to continue for the next six months, and indeed in certain regions, such as Europe, it may well increase because of the immediate challenges.

Looking ahead he said “there is strong evidence of pent up demand for air travel”, but forewarned “full recovery is going to take time for the air travel sector”.

You can learn more of Brian Pearce’s observations in his full CAPA Live presentation:

CAPA Live screens on the second Wednesday of every month throughout 2021, bringing together thousands of aviation professionals to listen and interact with industry leaders. You can access the agenda and register for the latest edition and archive content here: CAPA Live

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