The coronavirus outbreak has upended commercial aviation, with consequences that are not fully realised. The airline trade group, International Air Transport Association(IATA), anticipates that the world’s air carriers will see this year’s revenues drop by more than half. Although there are some early signs of recovery in terms of demand but they’re too weak to make an impact on the financials of the industry.
According to a report from Moody's, the commercial aviation industry will continue to be devastated by the coronavirus pandemic for years to come,. The ripple effects will likely be felt across the entire global economy.
According to the report, the effect on stakeholders throughout the aviation business — from airport operators and aircraft leasing companies, to plane-makers and their suppliers — will shake up the industry well into 2022, and likely beyond. The industry fell to its lowest levels in April. The Economist summed up grim statistics from April of the global aviation sector. In April 2020, fewer than 31 million passengers took to the air. This volume was similar to traffic from the late 1970s. London’s Heathrow handled 200,000 passengers in the entire month of April (its average daily volume pre-Covid was slightly more than this number). In May, US air travel was 57 percent below normal; in Europe, 75 percent below.
"And the outsourcing by airlines of many services, along with the significance of their employment rolls and consumption of refined petroleum in normal economic times, supports economic activity across many sectors of the global economy," Moody's senior vice president Jonathan Root, wrote in the report.
The Moody’s report also talks about the recovery process to slow down further due to multiple waves of the pandemic. It says, "Recent experience of increasing rates of infection concurrent with loosening social distancing and quarantine protocols indicates that passenger demand will likely align more with our slower recovery case," the report said, "as social distancing and quarantine protocols are more likely to be maintained and/or revert to more restrictive mandates as infection rates rise again."
As per IATA’s report released in June, the initial Q2 2020 financial results indicate that the airline industry will post its worst quarterly financial performance, extending the losses in Q1 2020, as COVID-19 became widespread across all regions. Although airlines immediately imposed stringent cost cutting measures to preserve cash and limit the impact of unprecedented revenue loss, the industry continues to face falling cash balances.
Airline shares in general were hit harder than wider equity index in the first half of the year. European airline shares declined as investors remain sceptical about long-term travel outlook. Similarly, Asia-Pacific airline shares declined even though the recapitalisation of some airlines and governmental support reduced liquidity concerns. Overall, in the first half of 2020, airline shares declined by more than the wider equity index as demand is expected to be soft for a prolonged time.
Resurgences in the number of cases have further slowed down any chances of recovery and have also erased the little amount of optimism which was created after the curve started to bend downwards. One such example is the global airline share price index which lifted in June due to the decrease in the infection rates. The North American airline index was the driver as the gradual recovery of demand and cost-cutting measures was anticipated to halt the cash burn of some airlines in this region by the end of the year. However, the optimism reversed later in the month amid the surge of COVID-19 cases in the region.
Financial results suggest that profitability deteriorated across all regions. According to a sample for Q1 2020, the severe negative impact of the pandemic on airline financials had started. Airlines in all regions, except for Latin America, posted negative EBIT. The net loss of the industry in one quarter approached the 2008 full year loss. As North and Latin America regions were affected by the pandemic towards the end of Q1, operating profitability declined to a lesser extent compared to other regions.
Initial Q2 data from North American carriers reflect that the adverse impact of COVID-19 had been greater than in Q1. Although cost cutting measures helped the bottom-line by partially offsetting revenue loss, Q2 results are expected to show further deterioration as all regions have been affected by groundings and travel restrictions for the entire quarter.
The cash position of the airline industry has been impacted severely due to massive cash outflows. The latest 1Q20 sample of 50 airlines shows that industry-wide net cash outflow from operating activities reached 3.6% of revenues. Although airlines were undertaking cost reduction and cash flow enhancing measures, these were not sufficient to cover the unprecedented decline in revenues.
Airlines have also reduced their planned full-year capital expenditures by renegotiating the delivery of aircraft and postponing any unessential investment, but capital expenditures increased to 23.0% of revenues with the plunge in revenues. Free cash flows plunged to a negative 26.6% of revenues in Q1. As travel demand recovers, cash flow pressure is expected to ease. However, airlines offered vouchers to passengers when they grounded their fleet globally starting from mid-March. This helped airlines to limit their cash burn at that time and prevented bankruptcies. However, with the restart of the industry, passengers have started to use these vouchers for their travel, which is not supportive for cash generation. Moreover, as travel demand is not expected to return to pre- crisis levels quickly, airlines expect to continue burning cash at least until the end of this year.
Ancillary revenues had become one of the most important sources for cash inflows for the airline industry before covid19 struck. Global base passenger yields (in US$, excluding surcharges and ancillary revenues) contracted by 0.7%. month-on-month in May following an uptick in April.
However, the yield data during the lockdown period should be taken with a pinch of salt as the number of tickets being sold declined dramatically and most of the sales were arising from repatriation flights.
Overall, the decline in premium yields was sharper than for the economy cabin and as a result global average passenger yields in US$ terms fell to be 3.4% below their level a year ago.
Revenue from the sales of premium class product was one of the major sources of revenue for the airline industry but this particular avenue was delivered a strong blow by Covid19. Premium class demand continues to decline faster than economy class demand. In the first four months of 2020, the share of premium-class passengers in all the international origin-destination traffic, declined to 4.9% from the 5.2% observed over the same period in 2019. Nevertheless, in the January-April 2020 period, premium cabin revenues represented 31.2% of total international revenues, up 0.2ppt compared to the same period of 2019.
While premium passenger traffic contracted faster than its economy counterpart in most of the regions, in the largest North Atlantic region it contracted more slowly. The Within Europe market posted the largest decline in economy fares (-9.6%) as airlines tried to stimulate demand. On the revenue side, the Within Asia market posted the largest outperformance of premium fares (+11%) vs. economy (-3.9%).
Both passenger and cargo demand finally managed to recover from record low levels(in April). The demand in terms of air passengers picked up in May from its lowest point in the history of the series. While seasonally adjusted revenue passenger kilometres(RPKs) increased month-on-month (MoM) by c.1% in May, RPKs were still 91% below their 2019 level. However, as countries, especially in the EU, began to relax restrictions, RPKs are expected to recover in June with the support of domestic and within region travel.
The rebound in air cargo demand was more visible in May compared to passenger demand. Seasonally adjusted industry CTKs lifted by 5.6% MoM. The increase in business confidence (PMI index) was supportive but the PMI index still remains in the area associated with a contraction in activity.
One other evidence that hints towards the recovery in the demand is the increase in capacity. In May, industry-wide available seat kilometres fell by 86% year-on-year, similar to the previous month (-87%). The equivalent seasonally adjusted measure contracted by 14% month-on- month.
In contrast to the passenger side, cargo capacity improved. Seasonally adjusted available cargo tonne kilometres increased by more than 12% month-on-month. This stemmed mainly from the increase in belly cargo capacity. Nevertheless, industry- wide available cargo tonne kilometres (ACTKs) were 34.7% lower compared to their level in the same period of 2019.
One more example that tells about the industry recovering from its lowest levels is the number of aircrafts being brought back in service due to the ease in lockdown measures after remaining grounded for months. Statistics from June depict that airlines continued to bring back aircraft from storage into service. An additional 4,109 aircraft re-joined the in-service fleet in the month. As a result, 40% of the aircraft taken into storage since the beginning of this year have returned to the fleet in the last two months. Total seat capacity improved by 32% compared to the previous month but was still 35% below the level of a year ago. However new aircraft deliveries were limited to 30 aircraft in June as airlines have been restricting their fleet investments following the COVID-19 crisis.
The demand for jet fuel has also started to recover from the all-time low during lockdowns but it is still depressed and the margins of refinery plants are squeezed as there is an over-supply of capacity in the market.
Passenger and cargo load factor trends have started to diverge which is an another sign of recovery. The industry-wide seasonally adjusted passenger load factor improved from the record-low level in April, rising 7.6percentage points to 50.3% in May. As travel restrictions are being lifted, demand improved from historically low levels.
In contrast to the passenger market, the air cargo load factor declined moderately in May, from its all- time high level last month. The air cargo capacity crunch eased with the return of some of belly capacity. The industry-wide seasonally adjusted cargo load factor eased in month-on-month terms by 3.5 percentage points. As airlines bring their passenger fleet back into service in the coming months, air cargo load factors can be expected to fall further.
The overall situation of the airline industry is very challenging due to the uncertainty and mountainous challenges that lay ahead. According to experts, after being hit by Covid, the industry has fallen so far into the abyss that any chances of a full recovery of the industry in the near future should be ruled out as it will require a lot of time, resources and out of the box solutions which can only be made once things get settled down or an element of certainty is visible.
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