Thursday, Dec 8, 2022
International Finance
Aviation Industry Magazine

Covid-19 & its impact on aviation industry

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With major airlines facing losses, many employees were laid off, or were asked to either go home without pay or face salary cuts.

The aviation sector is not a stranger to rising to the challenges of a crisis. There is no denying that 2020 was an exceptionally difficult year for all of us, and the aviation industry was no exception. In fact, this sector was one of the most hard-hit.

With major airlines facing losses, a large number of employees were laid off, while many were asked to go home without pay and others faced salary cuts. Industry revenues totaled $328 billion, around 40 percent of the previous years. It was also predicted by experts that the aviation industry will achieve its 2019 numbers only by 2024.

Keeping the financial woes aside, the long-term effects of Covid-19 on the aviation industry is slowly emerging. The obvious ones are concerns regarding hygiene and safety, which have definitely become more strict. The health, safety, and well-being of passengers and staff is the aviation industry’s number one priority. In order to follow through, airports around the world have introduced many new health and biosafety measures to ensure the safety of the passengers and that their efforts directly reflect and match with the current consumer trend. Airports and airlines along with the world have come together to resume global connectivity. At present, the rate of global vaccinations offers a hope that a return to normalcy is possible in the near future.

Leisure trips will fuel recovery
Experts estimate that while business travels will take longer to recover, and even then, it is only likely to recover to around 80 percent of pre-pandemic levels by 2024. Additionally, remote work and other flexible work arrangements are likely to remain in some form, even post Covid-19, which will lead people to take fewer business trips. In previous crises, leisure trips or visits to friends and relatives tended to rebound first, and this was first witnessed in the UK, after 9/11 and the 2008 global financial crisis. Not only did business trips take four years to return to the pre-crisis levels after the attacks on the World Trade Center but they also had not yet recovered to pre-financial-crisis levels when Covid-19 broke out in 2020. Hence, it is expected once Covid-19 subsides, the rise in leisure trips will lead to the recovery of business travel.

There are some air carriers that are highly dependent on business travelers, both those who are traveling in business class and economy seats right before they travel. While leisure passengers fill up most of the seats on flights and help cover a portion of fixed costs, its overall contribution to net profit is negligible, and marginal at best. Most of the profits earned on a long-haul flight are generated by a small group of high-yielding passengers, often traveling for business. But this pool of profit-generating passengers has shrunk because of the pandemic.

Relearning flight economics
After seeing the extensive effects of Covid-19 on the aviation industry, many experts have suggested that airlines should reevaluate the economics of their operations, especially long-haul flights. For example, currently, most carriers price point-to-point nonstop flights at a premium. Travelers who value time over price—mostly business travelers—book these nonstop flights. On the other hand, people who travel for leisure even those traveling in premium classes, are more price-sensitive and may choose an indirect routing. This large gap between nonstop pricing and connect pricing may need to narrow.

Secondly, lower business traffic may require network changes. Over the last few years, airlines have added many flights between hubs and smaller cities, using small-size widebodies such as the Boeing 787. These flights work primarily due to high-yielding business demand. With business demand subdued, economics favor larger aircraft flying less frequently. Many carriers may find that larger aircraft such as Airbus A350s or Boeing 777s—which have lower unit costs—become the base of the long-haul network.

Thirdly, airlines may also look at reconfiguring the layout of their cabins to address the increased share of leisure traffic. Additionally, products may also shift in order to cater to premium-leisure passengers, such as the growth of premium-economy cabins or the development of business-class seats more suitable for traveling as couples or groups.

Covid-19 and its effect on air control traffic
Last year marked the end of ten years worth of consistent growth in global passenger traffic. The ongoing pandemic managed to bring the airport around the world to a virtual halt in the second quarter of 2020, resulting in airport traffic revenue losses across all regions. While many countries have since then started to gradually reopen many parts of their economy, many states were confronted with more brutal waves of infection, and several states and countries decided to reimpose lockdown to control the spread of the virus.

Countries like France, Poland, Canada, India, and Chile had to increase or re-instate partial lockdowns in an effort to control the spread of a second, third, or even fourth wave of infection. While most countries have moved away from complete lockdowns, and currently they are trying to limit the infections with targeted and less disruptive restrictions, there are a large number of states and countries that have retained either partially or totally restrictive regulations for international travel including self-quarantine on arrival. 2020 represented a 64.6 percent decline in global passenger traffic compared to 2019. Europe and the Middle East were the two most impacted regions with similar declines of 5 percent compared to the projected baseline.

The Asia-Pacific region started recovering earlier and faster than other regions and ended the year by registering a decline of 61.3 percent. Asia-Pacific, however, recorded the highest traffic loss of all regions with a loss of 2.15 billion passengers in 2020. Comparatively, Latin America-Caribbean was the least impacted of all regions posting a decline of 61.1 percent. After the ‘great lockdown of 2020’, international passenger traffic was virtually non-existent in the second half of 2020 and international passenger volume ended with below 1 billion passengers, which is 75 percent less compared to 2019. Globally, domestic traffic volume for 2020 was recorded slightly above 2.4 billion passengers, a decline of 54.7 percent compared to 2019 volume.

Air tickets are set to become more expensive
As the pandemic hit, a lot of air carriers had to borrow money to stay afloat and cope with high daily cash burn rates. The airlines’ industry collectively amassed more than $180 billion worth of debt in 2020, which is ironically very close to the amount of revenue collected that year. And with debt levels still rising, it has become even more difficult to repay those loans back. In order to recuperate these costs, ticket prices are going to get higher. Experts estimate that ticket prices are going to rise by 3 percent and as air travel slowly returns to normal, it will likely outpace supply initially. But it will also take time for airlines to restore capacity, and this will bring delays in bringing aircraft back to service, and crew retraining might result in a demand gap, resulting in higher short-term prices. For some other cases, airline rescue efforts provided by the country’s government come with strings attached. We are already witnessing a reemergence of, or increase in, the level of state ownership and influence. For example, TAP Air Portugal, Lufthansa Group, and AirBaltic all received state aid along with an increase or reintroduction of government shareholdings.

The surge in travel for the second half of 2021
Currently, we are undergoing the biggest vaccination campaign accompanied by positive signs and prospects of recovery. With the Covid-19 pandemic slowly subsiding, travelers and industry stakeholders are eager to resume traveling. Additionally, industry experts have also forecast a surge in travel for the second half of 2021, with some terming the comeback of the aviation industry with a “post-war like a surge” in travel.

Even then, there has been a lot of uncertainty surrounding the recovery of the aviation sector. It is imperative that governments around the world have to learn to strike the balance between supporting the airline industry and how to preserve conservation by taking specific measures. But it is important to keep in mind that government interventions can have ambiguous effects on competition. With an effective vaccination campaign largely distributed in the second half of 2021, and added enthusiasm from passengers to start flying again in the second half of 2021 will add to its recovery. The third and fourth waves of infections are possible but rapidly contained and limited to specific regions. But, the fear to travel is still largely present among the population, along with prolonged economic downturn and slow airline fleet recovery. The third and fourth waves of infections are likely and could spread to multiple regions.

Based on these developments, it is predicted that global passenger traffic is now expected to recover to 2019 levels in 2024 and, most of it will be driven by the recovery of domestic passenger traffic. Globally, domestic traffic accounts for 58 percent of total passenger traffic as of 2019. If new variants of the virus are effectively contained, even then, it will take airlines at least 2023 to recover to the 2019 levels. The recovery of international passenger traffic will require one more year, thus getting back to 2019 levels only in 2024. In the long run, it is predicted that global traffic may take up to two decades to return to previously projected levels.

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