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Airlines and COVID-19: there must be sustainable recovery

18 May 2020: COVID-19 has been brutal for the airline industry and all industries that depend on it. There has been a roll-call of airlines announcing huge redundancies; but will air travel really never be the same again?

Alexandre de Juniac, Director General and CEO of  the International Air Travel Association (IATA), has been vocal about the airline recovery and what will and won’t work. “We have seen the UK announce a mandatory 14-day quarantine as part of its plans when easing its lockdown. Similarly, Spain announced a 14-day quarantine measures on arrival would be in place there until at least 24 May and possibly longer. International travel cannot re-start under such conditions.”

He continued: “Our top priority is to re-start this industry safely. We are proposing a series of measures that we believe will give governments the confidence to re-open their borders. It is a risk-based layered approach to biosecurity that needs to be coordinated globally.”

This involves temperature checks and other measures at departure to keep symptomatic travellers from flying, as well as a robust government managed system of health declarations and rigorous contact tracing.

The IATA chief’s other bug-bear is vouchers. “Under EU 261 Europe’s airlines will need to return around EUR9.2 billion for cancelled flights through the end of May,” he said. “EU 261 was not designed to deal with mass cancellations as have been necessitated by government-imposed lockdowns in the fight against a global pandemic. We asked for the flexibility to issue refundable vouchers—or delayed reimbursements—that would enable airlines to preserve some precious cash to survive the crisis and ensure consumers will get their funds.”

It is more than tricky to balance the survival of airlines against consumer needs, and the arguments are likely to run for a while. However, we are starting to see what recovery might look like at a more granular level for different sectors and the implications of suggested solutions.

Iain Wright, Director for Business and Industrial Strategy at ICAEW, commented: “The aviation industry is a truly global sector, which has created millions of jobs and opened up and connected the world in terms of trade and travel unimaginable even a few decades ago.

“The UK is at the heart of this industry, from world-class aviation manufacturing to being at the centre of airline transport hubs. This competitive advantage needs to continue for the UK after the Coronavirus crisis has ended. However, there is an environmental cost to airline travel, and measures to balance the impact on carbon emissions with economic and social benefits need to be at the forefront of policy.”

The airline industry is an extreme example of what a pandemic can do to a sector. IATA says that global revenue per kilometre (RPK) will recover 2019 levels in 2023, two years behind GDP recovery. RPKs are airlines’ economic health metric. These are the important numbers that show an airline is sweating its assets, operating the right routes, engaging with the right markets and has the right offer.

Airlines are particularly vulnerable to world events. War, disease, terrorist attacks, ash clouds, extreme weather – they will all put a hole in an airline’s financial performance. And all the while, airlines operate hugely expensive assets, meet onerous financing commitments, negotiate turbulent oil prices, confront capricious markets, fight off competition and modernise their business models.

Airlines are one of the few sectors that have rehearsed for COVID-19. SARS in 2003 and MERS in 2012 took their toll, but nothing compares with COVID-19. A vaccine is central to re-opening world travel markets. Social distancing – a key strategy to manage contagion – is not an option for most airlines; it would make most of them financially unviable.

IATA points out that China’s domestic air travel is lagging business confidence – and China, for the time being, is our benchmark for the rest of the world. The airline body predicts that the average trip length will fall sharply, and that domestic markets will open first with an initial preference for short-haul trips. At least fuel prices are extremely low – not much of a silver lining when so few people are travelling.

Shockingly, IATA reckons that international air travel may not recover 2019 levels until 2023-24; no wonder airlines have been so fast to shed cost. However, long- term drivers for expanded demand remain, says IATA, with populous emerging markets still likely to want more air services.

There will be a return to growth post-COVID but at a lower level, it predicts. In fact global RPKs are forecast to be 32-41% below expected levels, even in 2021. Just imagine, around one-third of revenue expected to be earned in 2021 just will not materialise under existing modelling.

But it is a different story on the air cargo front. All told, around 90% of the world’s passenger fleet has been grounded by the pandemic. Paradoxically, on the air cargo front, demand has been high and freight rates have spiked. Why? Around 50% of air freight is carried in the bellies of passenger aircraft and, when there is no demand on the passenger side, belly freight capacity falls away, leaving a gap between supply and demand.

The world has been screaming for shipments of medical equipment, food and other supplies when much other economic activity has otherwise ground to a halt. This has made air cargo – often dismissed as an environmentally unsound link in the supply chain – a significant player in the management of the crisis and a definite candidate for enabling the recovery.

Another aviation sub-sector that has fallen victim to the pandemic is airports whose operations have been ruptured and revenues shattered. Airports Council International’s (ACI) World Governing Board has called for urgent relief measures for airports to assist in dealing with the impact of COVID-19. ACI World estimates a reduction of more than 4.6 billion passengers with a decline in total airport revenues on a global scale of more than $97 billion for 2020.

The speed of decline in air transport has been staggering and IATA may well be right that we have several years’ disruption ahead, but is it really likely that the world will retreat into communities and ignore everywhere else it has explored for generations?

Wright concludes: “Global business travel may decline as companies continue with the practice of video conferencing, which really came into its own through this crisis. Nevertheless, airline travel will continue to grow throughout the next century. Sustainability on every level, from environmental to economic, needs to be the priority."