By Chen Chuanren, Victoria Moores and Karen Walker
The air transport industry’s recovery remains uneven region to region, and there are concerns about the general economy and a global recession, but airline leaders seem confident in a return to pre-pandemic levels of growth, with many already seeing it.
IATA chief economist Marie Owens Thomsen laid out a mixed bag in an industry outlook presented during the association’s AGM in Doha, Qatar, in early June. She acknowledged that Russia’s invasion of Ukraine, with the associated significantly higher oil prices, had “taken the fizz out of the economy,” with GDP now at a cooler 3.4%, down from 5.8% last year. Increased costs related to climate change, geopolitical conflicts, energy price hikes and the heavy debt burdens carried by airlines as a result will be challenging, Owens Thomsen said. That means higher costs for fuel, labor and infrastructure. It also means that overall airline RPKs this year will still be at just 43.4% of 2019 levels. However, Owens Thomsen said the economic challenges did not necessarily mean there will be a recession, and within the industry some regions are faring better than others. Overall, airlines are expected to cut their losses from -$42.1 billion in 2021 to -$9.7 billion this year. North American carriers are expected to buck the trend and post a collective net profit of $8.8 billion in 2022.
European airlines will get closer to profitability with a $3.9 billion net loss and Middle East airlines are expected to narrow their loss to -$1.1 billion. Latin American carriers recovered well in 2021 but are still expected to post a $3.2 billion net loss this year, while Asia-Pacific and Chinese airlines, still dealing with travel restrictions, are forecast to see net losses decline to -$8.9 billion. African carriers are expected to post a $0.7 billion net loss. Owens Thomsen said that airlines were seeing a “phenomenal and rapid improvement that is a testament to the resilience of the industry” and there was “a lot of industry confidence” that was seen in behavior, such as airlines taking more and more new aircraft deliveries. This year’s ATW World Airline Report also reflects that in the number of aircraft back in operation after being grounded during 2020, although widebodies are slower to return. Nevertheless, even the Airbus A380, classified as a very large aircraft, is making a return on some routes. Emirates Airline president Tim Clark was among those airline chiefs demonstrating confidence. He said the industry was “remarkably resilient” and has always come back from crises, including the 9/11 terrorist attacks in 2001 and the 2008/09 financial crisis. He said he did not see the pandemic crisis being any different, although he did express concern about the long-term impact of what he called the “geopolitical wall” that has resulted from Russia’s invasion of Ukraine. Outside of that concern, he said the demand for air travel was coming back “at huge speed” wherever restrictions were lifted.
The China Exception The major exception in 2022 to the return to normal is China. Wuhan was the first city in the world to enter a full-scale lockdown because of COVID-19. Flights were banned from departing the city as authorities grappled with an unknown virus spreading across the city. The swift and strict lockdown allowed the country to have almost no COVID cases by mid-2020, and domestic air travel surged, at one point making China the largest domestic market, surpassing the US. The emergence of the delta and later the omicron variants quickly made the China lockdown playbook nearly invalid, however. While the rest of the world gradually opened borders and relaxed testing requirements, China remained glued to its zero-COVID policy, imposing flash lockdowns in major cities, including Shanghai, which endured a strict 60-day lockdown that was not lifted until June 1. China’s shutdown has severely affected other countries, especially Cambodia, which relies heavily on Chinese tourism, accounting for 36% of all arrivals in 2019. In 2021, Cambodia’s three international airports—Phnom Penh, Siem Reap and Sihanoukvill—handled 270,000 passengers, just 2% of 2019 levels. Subhas Menon, director general at the Association of Asia Pacific Airlines (AAPA), believes people will travel to wherever is most convenient and that center of gravity will shift toward Southeast Asia and India in line with the dropping of testing requirements. Even freight movements will shift southward as industries reevaluate the risks of having manufacturing bases in China. Overall, Asia-Pacific airlines are seeing a significant rebound since travel restrictions have eased. Asia-Pacific airlines carried 7.3 million international passengers in May, more than five times the total from the same month in 2021. This lifted the May total to 23.6% of the pre-pandemic level of May 2019. Average international load factor for these airlines rose by 43.7 percentage points year-on-year in May, to 71.5%. Challenges for airlines include rising fuel, labor and maintenance costs, as well as heavier debt burdens, Menon said. This means that “keeping a lid on costs remains vital.” Menon also noted that airlines in general “face increasing operational constraints as the air transport ecosystem strives to keep up with the ramp-up in demand.”
European uncertainty In Europe and the UK, restrictions have mostly lifted, and travel levels are surging, but the region has been hit this year with a fresh volley of challenges, including the impact of Russia’s invasion of Ukraine, spiraling fuel costs and staff shortages. Ukraine is more of a longer-term uncertainty issue for most airlines: How long will it continue and will it spread? The near-term issues are operational as staff shortages led to lengthy queues, delays and cancellations at major hubs like Amsterdam Schiphol, Dublin and London Heathrow. European Commission director general for mobility and transport Henrik Hololei believes the situation will take a while to resolve. “I would say we are going to see the disruptions throughout the summer and we haven’t even yet achieved the peak period, which is July and August. The solutions are not going to be fast, nor easy,” he said. Sustainability has also become a pressing concern for European airlines, with the European Union’s Fit for 55 package looming on the horizon. According to lobbying group Airlines for Europe (A4E), the annual cost of complying with Fit for 55 will reach €5.5 billion ($5.6 billion) in 2025, €12.8 billion in 2030, €21.8 billion in 2035 and €34.4 billion in 2050.
Middle East & Africa Across the Middle East, the major full-service carriers and ever-growing LCCs are expanding networks once more and forming more partnerships. Abu Dhabi-based Etihad Airways, for example, continues to deepen its relationship with LCC Air Arabia in a joint venture, while Air Arabia is forging joint ventures in Armenia—creating Fly Arna—and in Pakistan—creating Fly Jinnah. For the most part, the hub-and-spoke model of the big Gulf carriers is restoring, while smaller, niche carriers are finding new markets, especially in tourist destinations. Lower vaccination rates in Africa have slowed the continent’s air travel recovery, but the expectation is that 2022 will see some catching up. The African Airlines Association (AFRAA), which represents 44 airlines across the continent, has seen capacity coming back, albeit slowly. “Generally, across Africa, passenger traffic volumes remain low because of the high ticket cost and travel apathy,” AFRAA said, adding that the situation may improve during the peak summer season. However, African carriers continue to face cash-flow problems, partly because of a lack of scale. “Full-year revenue loss for African airlines for 2022 is estimated at $4.1 billion, equivalent to 23.4% of the 2019 revenues. In 2021, African airlines cumulatively lost $8.6 billion in revenues due to the impact of the pandemic, representing 49.8% of 2019 revenues,” AFRAA said in June. Some carriers are looking to tackle this scale issue, with South African Airways (SAA) and Kenya Airways moving forward with a partnership forged in November 2021.
Americas Domestic air traffic demand in the US has surged in 2022 and there has also been significant pickup in international demand since testing and other COVID-related requirements were lifted. The LCCs are faring particularly well, with leisure travelers eager to pursue long-delayed vacations and family gatherings. But a multitude of operational factors, including labor shortages, weather and air traffic control issues, are causing widespread cancellations and delays. That could eat away some of the precious profitability that US carriers are expected to return to this year. There is also the potential for a significant consolidation in the LCC sector, although the scenario was still playing out in July. Denver-based ultra-LCC Frontier Airlines, owned by LCC specialist Indigo Partners, bid to acquire Fort Lauderdale-based Spirit Airlines. New York-based JetBlue quickly entered the fray and there have been multiple offers in what has become a war to entice Spirit’s shareholders. Depending on the outcome, more LCC consolidation could follow and this already growing sector could become influential, akin to how the European LCCs have reshaped that region’s air travel market. Canadian airlines have similarly been struck by operational issues as demand ramp-ups clashed with labor shortages. Air Canada has streamlined its summer schedule. Nevertheless, the general trend across North America is upward and toward profitability, with some carriers already seeing demand levels back to or surpassing 2019 levels. Across South America, demand is also strong and the region’s LCCs are also doing well. The main obstacles to full growth are governmental. High taxes and other anti-aviation regulations dampen demand and make it harder to be profitable. But, as in the Middle East, there is optimism among airline leadership. A US bankruptcy court approved LATAM’s plan for reorganization, and the company aims to exit Chapter 11 bankruptcy protection in the second half of this year. LATAM CCO Martin St. George said on the sidelines of the IATA AGM that demand in South America’s domestic markets was strong. “I’d say the farther north you go, the stronger they are,” he said, adding that demand on both long-haul transoceanic and North American routes is “sky high.”
