Airlines need to make deep labour cost cuts but even then they will not be able to achieve break-even, warns IATA, as it reiterates call for further support to stop continuing cash burn

30 October, 2020

International Air Transport Association (IATA) has presented new analysis showing that the airline industry cannot slash costs sufficiently to neutralise severe cash burn to avoid bankruptcies and preserve jobs in 2021.

"The handwriting is on the wall. For each day that the crisis continues, the potential for job losses and economic devastation grows," warns director general Alexandre de Juniac. "There is little good news on the cost front in 2021. Even if we maximize our cost cutting, we still won't have a financially sustainable industry in 2021."

As such, IATA has reiterated its call for government relief measures to sustain airlines financially and avoid massive employment terminations. IATA has also called for pre-flight COVID-19 testing to open borders and enable travel without quarantine.

The organisation's research shows that total industry revenues in 2021 are expected to be down -46% compared to the 2019 figure of USD838 billion. Its previous analysis was for 2021 revenues to be down around 29% compared to 2019.

This had been based on expectations for a demand recovery commencing in the fourth quarter of 2020, but recovery has been delayed however, owing to new COVID-19 outbreaks, and government mandated travel restrictions including border closings and quarantine measures.

IATA also expects full year 2020 traffic to be down -66% compared to 2019, with Dec-2020 demand down -68%. "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," says Mr de Juniac.

According to the IATA DG 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," he acknowledges.

IATA says that although airlines have taken drastic steps to reduce costs, around 50% of airlines' costs are fixed or semi-fixed, at least in the short-term. The result is that costs have not fallen as fast as revenues. For example, the year-on-year decline in operating costs for the second quarter was -48% compared with a -73% decline in operating revenues, based on an IATA sample of 76 airlines.

Furthermore, as airlines have reduced capacity (available seat kilometres, or ASKs) in response to the collapse in travel demand, unit costs (cost per ASK, or CASK) have risen, since there are fewer seat kilometres to 'spread' costs over. Preliminary results for the third quarter show that unit costs rose around +40% compared to the year-ago period, according to IATA.

Looking forward to 2021, IATA estimates that to achieve a breakeven operating result and neutralise cash burn, unit costs will need to fall by 30% compared to average CASK for 2020. "Such a decline is without precedent," it says.

While IATA is not advocating specific workforce reductions, maintaining last year's level of labour productivity (ASKs/employee), would require employment 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. But, even if that unprecedented reduction in labour costs were to be achieved, total costs will still be higher than revenues in 2021, and airlines will continue to burn through cash.

Even with big labour cost cuts, IATA warns that airlines will not be able to achieve break-even and will need further support to stop continuing cash burn (Source: IATA Economics using data from IATA, Airline Analyst)

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

"Moreover, the loss of aviation connectivity will have a dramatic impact on global GDP, threatening $1.8 trillion in economic activity. Governments must take firm action to avert this impending economic and labour catastrophe. They must step forward with additional financial relief measures. And they must use systematic COVID-19 testing to safely re-open borders without quarantine," he adds.