Global aviation outlook: delayed but persuasive recovery despite new turbulence

The pandemic has hampered the airline industry for much longer than expected. After the recovery began in 2021, new waves of the virus and fresh travel restrictions prevented the sector from scaling up. This year, however, is meant to be the year of delayed but sustained recovery, despite new scars. Global passenger traffic (RPK) recovered to 50% of pre-pandemic levels in the first months of 2022, but intercontinental traffic still has a long way to go.

What we learned from 2021 is that when restrictions are lifted, demand for travel is still there, particularly for family visits and holidays. Many air passengers have suspended trips over the last two years leading to pent-up demand. This could also lead to ‘front loading’ this summer as consumers may consider these travel freedoms to be temporary. This suggests the recovery could lose strength later on.

Passenger traffic showed a significant increase, up two thirds of pre-pandemic levels in March in Europe’s main airports. Airlines such as Ryanair have reported stronger international bookings – especially for short-haul international flights despite uncertainty from the war in Ukraine and higher ticket fares. Sales data on international tickets also point in this direction. Following a weak 2021 – especially in Europe – airports also expect a much better 2022.

Flights have returned stronger than passenger numbers (possibly also to retain slot rights). Average global passenger load factors are still hovering around 70%, which shows that occupancy rates of aircraft are still lower than the pre-pandemic levels of >80%. This means that the cost-efficiency of airlines is still suboptimal which weighs on cost-income ratios. How load factors evolve is therefore something to watch as well in 2022.

Paradoxically, hiring staff is now a critical factor in getting aircraft frequency back online, as airlines cut their workforces over the pandemic and cabin crew staff left for other sectors. Sick leave rates are also higher than before, which is leading to operational challenges. For every restored flight additional personnel and job markets are tight. This may limit expansion, frequencies and routes, especially in the US (e.g. Jetblue).

• The mutual closing of air spaces has led to a reduction of passenger traffic to and from Russia and Ukraine. Russia accounts for 4.5% of global revenue passenger kilometres (RPK), and because of the sanctions this will undoubtedly go down as Russian holidays to European countries will fall (Russian travelling accounted for 5.7% of European traffic in 2021). Domestic travel will also suffer.
• The massive size of the Russian airspace avoidance affects some 10% of total passenger kilometres, according to IATA. Avoiding Russian airspace leads to detours and longer flights on East-West routes (e.g. from London, Amsterdam or Frankfurt to Tokyo, Seoul or Beijing). This will make trips less efficient and pushes up fuel costs even more, leading to higher ticket prices and extra capacity deployment.
• The war in Ukraine also leads to direct new capacity cuts. The grounding of Russian carriers like Airbridge cargo (approx. 20 freighters) due to the closing of airspaces and disturbed supply of spare parts for freighters reduces capacity. Lufthansa expects global air cargo capacity to consequently be reduced by 10%, and global airfreight forwarder Kuhne Nagel indicated its capacity was down 30% on the Far-East Europe route following the sanctions. Due to scarce capacity, airlines are also considering re-allocating capacity to (possibly more profitable) other routes.
• In total, hundreds of aircraft leased to Russian operators were still in Russian territory at the end of March, but they are not in service on the usual international routes anymore. It’s uncertain how many eventually will be returned to the lessors, but this will also curtail global capacity.

Although we expect the recovery in aviation to continue this year, global passenger volume is not expected to recover in full before 2024. The war in Ukraine will temper the pace of recovery in 2022. In addition, a setback in the large Chinese airline market due to new Covid-related restrictions is slowing the return of travel volumes as well. Without these events, the recovery would undeniably have been stronger this year. For airlines based in the US, the impact will most likely be less severe than for European airlines, and the impact for low-cost carriers will also be less than for traditional intercontinental operating carriers. Despite the long haul to recovery, global passenger figures are still expected to eventually return to an annual growth trend of 3% or 4%.

On the back of a large home market, airlines in the US performed better than European airlines over the last year. Mid-April 2022 passenger checks at US airports are back to around 90% of pre-pandemic levels and bookings appeared to be relatively strong. European flight numbers returned to 80%, but passenger load factors in Europe are still below the 70-80% US figures.

A relevant difference is that the American (highspeed) rail network is less intensively developed than the European system and distances are longer, so there are fewer alternatives while airline interconnectedness is high. In Europe though, rail network connections are being extended and governments, like the French, aim to shift short-haul flights to rail on short notice.

Contrary to the US, the Chinese airline market has slumped after new Covid-related lockdowns. After an almost full return to pre-pandemic levels early in 2021, domestic airline travel figures started to decline again and were around 60% in early 2022. The risk of new measures has led to uncertainty about when the recovery might pick up again.

The other major Asian growth market, India, is also seeing a strong trend of returning domestic airline traffic, which can also be seen in India's public transport. With a growing middle class, India could be a driving force behind the global recovery in the years to come.

The dynamics of the post-pandemic world make it relevant for airlines to review their business models and strategy. Air networks may emerge smaller than previously expected and volumes could remain more volatile. With fewer business passengers, smaller aircraft may gain popularity. This will further benefit single-aisle aircraft, which are more flexible and easier to fill. Some airlines may consider changing their seat composition to include fewer business seats and more upgraded economy class seats (‘economy plus’).

In today’s world, freighters are also becoming more structurally important. Freight cushioned the drop in results for intercontinental carriers and due to high rates, it even counted long-haul international passenger routes will take the longest to recover and these are important for belly freight.

The gradual rise in oil prices in the second half of 2021 and the spike following the war in Ukraine significantly pushed up airline operational costs. Over the fourth quarter of 2021, jet fuel costs already accounted for 24% of airlines' total operating expenses and this will go up further. Even if oil prices ease in the remainder of 2022, results will be hit and this complicates the return to profitability for many airlines this year.

To what extent airlines are affected depends on fuel hedging strategies. In general, low-cost carriers apply hedging rates more than traditional carriers, which implies that the impact for 2022 will be mitigated. Traditional carriers usually accept more risk on the fuel side, with lower hedging rates. This means higher kerosine prices tend to affect them more.

And there is also a difference between European and American airlines as the latter tend to bear the risk themselves (Southwest airlines using hedges is an exception).

Airlines like Air France, KLM and Delta have started to raise ticket fares with fuel surcharges. A positive note is that travellers seem willing to pay extra for their tickets at this point (with oil prices just above $100). Nevertheless, high fuel prices make fuel efficiency even more important.

One thing the pandemic made clear is the need for flexibility and a fast alternative in case of unexpected circumstances. Air freight is more expensive but keeps supply chains agile, although timeliness is also several days longer than the normal six days ex-works to the destination airport. After a strong double-digit rebound in 2021, market growth will significantly slow this year with world trade flattening and a normalisation in e-commerce growth. Air cargo rates on the Far East-Westbound trade are still four times higher than pre-pandemic, but the competitive position for shippers remains relatively good amid disrupted supply chains.

Capacity remains a limiting factor in airfreight through 2022 and the war in Ukraine has curtailed this further. Belly freight capacity has started to return, but not in full yet and compared to the 5-10% larger freight volume there’s still a substantial deficit. The global fleet of full freighters increased by a net 40 in two years but this doesn’t compensate. And this year, permission for transporting freight in passenger aircraft (e.g., for medical products during the pandemic) ends in the US as well as in the EU (from mid-2022).

The capacity shortage on the freight side has led to various initiatives to expand among airlines, logistics services providers and remarkably also shipping companies. Among others, Emirates, Qantas and Air Canada plan to expand their fleets from 2024 by adding freighters and converting passenger jets.

On the logistics side, Amazon, DHL, UPS, as well as K+N and container liners CMA CGM, Maersk and possibly MSC are expanding and setting up (chartered) freighter fleets and airlines are revaluing the cargo activities as well. Amazon, in particular, is absorbing a lot of the market growth. Its freighter fleet has grown to 88 (mostly B767 60-ton) and it explained this will continue this year.