Ready for lift-off?

The International Air Transport Association (IATA) announced an upgrade to its outlook for the airline industry’s 2022 financial performance as the pace of recovery from the Covid-19 crisis quickens.

The 78^th Annual General Meeting and World Air Transport Summit took place in Doha, Qatar, from June 19 to 21. Here, the IATA announced that industry losses are expected to reduce to US$9,7 billion (improved from the October 2021 forecast for a US$11,6 billion loss). This is a huge improvement from losses of US$137,7 billion in 2020 and US$42,1 billion in 2021.

“Airlines are resilient. People are flying in ever greater numbers and cargo is performing well against a backdrop of growing economic uncertainty,” said Willie Walsh, IATA’s director general. “Losses will be cut to US$9,7 billion this year and profitability is on the horizon for 2023. It is a time for optimism, even if there are still challenges on costs, particularly fuel, and some lingering restrictions in a few key markets.”

Industry revenues are expected to reach US$782 billion, a 54,5% increase on 2021. Scheduled passenger numbers are expected to reach 3,8 billion, with revenue passenger kilometres (RPKs) growing 97,6% compared with 2021, to reach 82,4% of 2019 traffic. Overall, the industry is expected to carry over 68 million tonnes of cargo in 2022 – a record high.

Total expenses are expected to rise to US$796 billion. That is a 44% increase on 2021, which reflects both the costs of supporting larger operations and the cost of inflation in some key items.

The war in Ukraine is keeping prices for Brent crude oil high. Nonetheless, fuel will account for about a quarter of costs in 2022. A particular feature of this year’s fuel market is the high spread between crude and jet fuel prices. This jet crack spread remains well above historical norms, mostly owing to capacity constraints at refineries. Under-investments in this area could mean that the spread remains elevated into 2023. At the same time, high oil and fuel prices are likely to see airlines improve their fuel efficiency – both through the use of more efficient aircraft and through operational decisions.

Labour is the second-highest operational cost item for airlines. Direct employment in the sector is expected to reach 2,7 million, up 4,3% compared to 2021, as the industry rebuilds from the significant decline in activity in 2020. Employment is still somewhat below the 2,93 million jobs in 2019, however, and is expected to remain below this level for some time.

The time required to recruit, train, complete security/background checks, and perform other necessary processes before staff are “job-ready” is presenting a challenge for the industry in 2022. In some cases, employment delays may act as a constraint on an airline’s ability to meet passenger demand.

In countries where the economic recovery from the pandemic has been swift and the unemployment rate is low, tight labour markets and skill shortages are likely to contribute to upward pressure on wages. The industry’s wage bill is expected to reach US$173 billion in 2022, up 7,9% on 2021, and disproportionate to the 4,3% increase in total jobs.

There are also several risk factors associated with the IATA’s outlook.

The War in Ukraine

The impact on aviation of the war in Ukraine pales in comparison to the unfolding humanitarian tragedy. The outlook assumes that the war will not escalate beyond Ukraine’s borders, but among the many negative impacts an escalation of the conflict could have for aviation, rising fuel costs and a dampening demand due to lowered consumer sentiment would be paramount.

Passenger: Combined, the Russian international market, Ukraine, Belarus, and Moldova accounted for 2,3% of global traffic in 2021. In addition, about 7% of international passenger traffic (RPKs) would normally transit Russian airspace according to 2021 data. This airspace is now closed to many operators, mostly on long-haul routes between Asia and Europe or North America. There are significantly higher costs for re-routing for those carriers affected.

Cargo: Just under 1% of global freight traffic originated in, or is transited through, Russia and Ukraine. The greater impact is in the specialised area of heavy-weight cargo where Russia and Ukraine are the market leaders, and the corresponding capacity loss will be difficult to replace. Data from 2021 show that about 19% of international cargo shipments transit through Russian airspace; carriers impacted by sanctions again face higher costs for re-routing.

Covid-19

The underlying demand for travel is strong. But government responses to Covid-19 ignored the World Health Organization’s advice that border closures are not an effective means of controlling the spread of a virus. The outlook assumes that strong and growing population immunity to Covid-19 means there will not be a repeat of these policy mistakes. There is, however, the risk that governments will return to border-closing responses to future outbreaks.

“Governments must have learned their lessons from the Covid-19 crisis. Border closures create economic pain but deliver little in terms of controlling the spread of the virus. With high levels of population immunity, advanced treatment methods, and surveillance procedures, the risks of Covid-19 can be managed. At present, there are no circumstances where the human and economic costs of further Covid-19 border closures could be justified,” said Walsh.

Regional round up

The financial performance in all regions is expected to improve in 2022 compared with 2021, following the improvement in all regions in 2021 compared to the previous year.

North America is expected to continue to be the strongest performing region and the only region to return to profitability in 2022. Supported by the large US domestic market and the re-opening of international markets, including the North Atlantic, demand (RPKs) is expected to reach 95% of the pre-crisis levels in 2021, and capacity 99,5%.

In Europe, the Russia-Ukraine war will continue to disrupt travel patterns within Europe and between Europe and Asia-Pacific. However, the war is not expected to derail the travel recovery, with the region edging closer to profitability in 2022. Demand is expected to reach 82,7% of pre-crisis levels, and capacity 90%.

For Asia-Pacific airlines, strict and enduring travel restrictions (notably in China), along with an uneven vaccine rollout, have to date seen the region lag in terms of recovery. As the restrictions diminish, travel demand and capacity are expected to increase quickly, reaching 73,7% and 81,5% of pre-crisis levels respectively.

Traffic volumes in Latin America recovered robustly in 2021, supported by domestic markets and relatively fewer travel restrictions in many countries. The financial outlook for some airlines, nevertheless, remains fragile. Demand is expected to reach 94,2% of pre-crisis levels, and capacity 93,2%.

In the Middle East, this year’s re-opening of international routes and long-haul flights in particular will provide a welcome boost for many. Demand is expected to reach 79,1% of pre-crisis levels, and capacity 80,5%.

In Africa, lower vaccination rates have dampened the region’s air travel recovery to date. However, some catching up is likely this year, which will contribute to an improved financial performance. Demand is expected to reach 72% of pre-crisis levels, and capacity 75,2%.

This year will definitely not be a repeat of 2020, as it seems that air travel is well set to soar towards recovery.