Aviation sector outlook: The pandemic is testing airlines for far longer

The year 2020 will echo for a long time in the aviation sector.

Following the global Covid-19 pandemic airline passenger volumes tumbled no less than 66% compared to 2019 and airlines across the world reduced staff, adapt their organizations and take on (government) emergency plans.

As a consequence, plummeting passenger levels inevitably increased inefficiencies which are reflected in the global average load factor falling to just 57.5% in FY20 whereas in a normal year it is around 80%.

As the pandemic rages on and travel restrictions remain in place, sustained recovery is only expected to take off from the second half of 2021, when widespread vaccinations and potential travel policy based on testing bring relief. The jury is still out on whether the sector will be able to benefit from the summer season.

If airline passenger traffic stays at February 2021 levels for the rest of the year, we might end up just below last year’s average. All recovery from this point will turn into year on year growth. Depending on travel restrictions, IATA expects growth for 2021 to come in between 13% and 50% compared to 2020, just 40%-50% of pre-pandemic levels.

There is consensus among industry sources like IATA, Airbus and airport operators that a full recovery of sector volume is expected to take until 2024-2025.

Nevertheless, the general assumption is volume will ultimately return to its growth path in the long run, although the path will most likely be less steep than before. Boeing expects an average annual revenue passenger kilometre (RPK) growth rate of 4% for 2020-2040, driven by strong growth from Asia, which is already the largest airline market.

This is 6% below pre-pandemic levels and slightly less than the OECD pre-pandemic forecast of 4.5%, but this could still be on the optimistic side if business travel is structurally reduced and government taxation makes flying more expensive.

Despite the international travel restrictions, domestic travel is recovering but there are significant differences.

Large domestic markets like China and Russia are leading the way while this trend seems to be much less visible in the US or Europe.

This is reflected in operational results of continental active (low-cost carrier) airlines (e.g. Southwest Airlines, Easyjet). At least in the first half of 2021 this pattern is expected to last. Besides that we expect that leisure travelling and visiting friends and family (two-thirds of passenger volume at larger international airports in the EU) will be the first to recover when vaccination rates increase and restrictions are eased.

Business travelling is likely to return at a much slower pace as digital meetings, conferences and remote working will continue for some time. This means demand for business seats will continue to lag affecting profitability.

Despite restructuring plans, government support and job cuts, airlines continue to burn cash and cost pressure remains high, given the recovery is delayed

In 2020 falling fuel prices provided some relief, but since then oil prices have rebounded significantly from the lows seen in the second half of 2020. We expect ongoing upward pressure on oil prices throughout 2021 which will results in higher kerosene prices, trading over 40% higher than last years average by the end of February.

As airlines normally spend roughly 15-30% of their total expenses on jet fuel, this has a substantial cost impact. To manage fuel price risks, some airlines hedge fuel prices both completely and partially.

Capacity is expected to remain restricted in air cargo this year, as many intercontinental widebody aircraft carrying freight in their bellies (lower deck) are grounded. Roughly 50% of total airfreight is normally travelling in the belly. Extra freighters deployed still match only 60% of the missed belly capacity at the start of 2021, but load factors are on the rise.

Due to capacity scarcity, freight tariffs sky rocketed in the spring of 2020 and still are much higher than the normal average of around $ 2-3 per kg. This resulted in higher revenues despite the lower volume. Higher are expected to last into 2021. After an 11% hit in 2020, showed a continued recovery (graph).

We expect global airfreight volumes to rebound by around 10% this year as trade picks up and volatility in supply chains continues. Surging international e-commerce volumes – still largely shipped through the air - and vaccine distribution will support volume growth in 2021. Nevertheless, reduced connectivity could still be a threat.

In the past, air cargo was considered a niche activity receiving little attention, but now airlines operating freighters are making use of high tariffs providing some counterweight to losses in passenger transport. Some flag carriers – like AirCanada - are now, therefore, growing their freighter fleets.

Airports heavily relying on belly freight – like London Heathrow - suffered from lack of belly capacity, whereas others like Frankfurt profit from an increase in freighters taken into operation.

The developments in the airfreight market and their role in international e-commerce is attracting new players.

Amazon is rapidly extending its fleet to control its logistics network with a fleet already around 70 freighters (mainly B767 and B737s) as is parcel logistics company DHL also grew its fleet and operations too.

But what is particularly remarkable is the entrance of container shipper CMA CGM into this market looking to diversify its logistics activities, and competitor Maersk seems to have similar ambitions too.