ANALYSIS: Why 2021 Is Looking Scarier For Airlines
For airlines, the COVID-19 crisis brings no silver lining. They were stripped almost overnight and worldwide of passengers and revenue while retaining much of their high cost base.
As the full horrific extent of the financial impact became apparent by late March and early April—when bookings slumped to their lowest—airlines and industry analysts began to acknowledge that the northern hemisphere summer period, typically a strong season for airlines, would be not just substantially weakened, but wrecked. Most forecasters then clung to the notion that the 2020 fall and 2020/2021 winter seasons would see the beginning of the air travel demand turnaround. Airlines began restoring their networks, adding back destinations and frequencies, in hopes that leisure and business travelers might be more ready to fly through the third and fourth quarters.
As a COVID-plagued June morphed into a plagued July and then August, a far more pessimistic outlook set in for the pace of recovery.
IATA, which earlier this year forecast that airline RPKs would be restored to 2019 levels in 2023, pushed out that expectation by a year. RPK forecasts for the second half of 2020 were revised to be down 63% versus the 55% drop predicted earlier.
IATA chief economist Brian Pearce said global June RPKs were down by 86.5% versus June 2019. While that was better than April’s disastrous low point of -94.1%, it was a much weaker improvement than had been anticipated. Upturns were almost entirely based on domestic markets—chiefly in China and the US—and load factors remained at all-time lows, averaging 62.8% in domestic markets and just 38.9% on international routes.
The main reason for the slow improvement, Pearce said, was the highly restrictive border controls that continue to be in place around the world and which are cropping up at short notice, such as when the UK announced a 14-day quarantine rule for travelers from Spain and then added the same rule for the Bahamas while also saying it was considering removing France from its quarantine-free list. Within the US, states are issuing quarantine mandates to incoming travelers from those states where COVID cases have surged, an almost unprecedented situation where Americans are being isolated simply for crossing a state border.
“This creates uncertainty in the minds of the public,” Pearce said, and it’s sinking consumer confidence.
Business confidence is higher, but it is not translating to an increase in business flying.
“We are seeing a behavioral change in business travel,” Pearce said. Corporations are imposing severe restrictions on when and where people fly, which will have “some big consequences for the industry, at least in the short term and especially in long-haul markets.”
Events, conferences and expos that were postponed from the spring or summer to the latter half of the year are being postponed to 2021, turned into virtual events or canceled. Individuals and families who had tentatively re-planned vacations for later in the year are re-planning again and staying close to home, either because of concerns about the destination and quarantines or because of lowered incomes.
Until a vaccine becomes available, virus testing is seen as the quickest way to restore confidence in air travel, but it needs to be reliable, scaleable, comfortable and fast, and that likely won’t happen in time to save the fall or even the winter schedules. Airlines are instead confronted with slower bookings, higher costs related to increased hygiene processes, and low load factors. That is raising airline break-evens and will likely lead to some schedule restorations being canceled. They are also making significant fleet changes at both ends of the scale. United Airlines is removing seats from many of its Embraer E175 regional jets, downgauging the 76-seaters to 70-seat planes. The carrier does not see demand recovering to even 50% of 2019 levels until a vaccine becomes widely available, which CEO Scott Kirby believes will be late 2021 at the earliest. American Airlines will peg its third quarter capacity at just 40% of what it offered in the 2019 third quarter.
impossible” to predict how long the pandemic will persist and acknowledged that a second wave of COVID-19 cases across Europe in late autumn when the annual flu season commences “is our biggest fear right now.”
Lufthansa Group announced plans to permanently cut its 760-aircraft fleet by 100, a decision likely to most affect its widebodies and which is being mirrored by other carriers with large widebody fleets.
The longer the situation continues that airlines are burning cash while being severely limited in how much revenue they can generate, the wider the chasm will become between those that went into the pandemic with strong balances and those—the vast majority—that were already heavily indebted and financially vulnerable.
Ultimately, COVID’s “silver lining” for airlines might be an industry reset in which a strong cash safety net is not just prioritized but is considered more essential than fleets of shiny new aircraft. By the end of 2021, however, that lesson will be irrelevant to the many airlines that did not have the funds to outlive the virus beast.