BREAKING NEWS

Smaller airline industry looms on the horizon, post-pandemic

Pratap John

Wednesday، 26 May 2021 11:57 PM

The Covid-19 pandemic has devastated the global aviation industry that brings people together, delivers 35% of global trade by value, foster commerce and makes the world a smaller and more accessible place.
Last year, the industry revenues totalled $328bn, around 40% of 2019 and in nominal terms, that’s the same as in 2000.
The sector is expected to be smaller for years to come, prominent management consulting firm McKinsey & Company says and projects traffic won’t return to 2019 levels before 2024.
Business travel will take longer to recover, and even then, McKinsey & Company estimates it will only likely recover to around 80% of pre-pandemic levels by 2024.
Remote work and other flexible working arrangements are likely to remain in some form post-pandemic and people will take fewer corporate trips.
As the pandemic hit really hard, many airlines have had to borrow huge sums of money to stay afloat and cope with high daily cash burn rates.
Tapping into state-provided aid, credit lines, and bond issuances, the industry collectively amassed more than $180bn worth of debt in 2020, McKinsey & Company says, a figure equivalent to more than half of total annual revenues that year.
And debt levels are still rising. Repaying these loans is made even harder by worsening credit ratings and higher financing costs.
Willie Walsh, Director General of global airline body International Air Transport Association (IATA) expects the industry to emerge from the coronavirus crisis smaller and more cautious, doubting airlines will try to expand through acquisitions.
The airline industry has been crippled by the pandemic, which continues to leave many aircraft around the world grounded or flying near-empty as demand limps towards a recovery.
“It will be a smaller industry. We are not going to recover all the capacity,” Walsh said in a pre-recorded online interview broadcast recently.
He cited the swathes of aircraft retired and employees laid off or placed on furlough.
“It will be a more cautious industry. I don’t expect to see M&A (merger and acquisition) activity, principally because people will be guarded about the cash they have.”
Walsh said that spending “valuable cash resources” would be “too risky” but he believes there will be consolidation through airlines shrinking their operations and some failing.
“It’s going to take airlines time to repair their balance sheets,” Walsh said. IATA has forecast global travel demand to return to 2019, pre-pandemic levels in 2024.
While those airlines that survive would fill the gaps left by those that fail, they would have to be careful how quickly they rebuild, Walsh said, urging caution.
“Airlines are not going to be able to take the risk of operating unprofitable routes in the short term,” he told aviation consultant John Strickland.
However, according to Reuters, Walsh does not believe the crisis has undermined airline business models such as those for regional or low-cost carriers among others.
“Nothing has changed the competitive nature of this industry,” he said.
McKinsey & Company estimates that global air freight will see undersupply for some time. Over the past 10 years, low cargo rates and the unprofitability of the cargo business have led many airlines to relinquish or scale back their dedicated cargo freighter fleets.
“However, cargo has been a lifeline for the aviation industry during Covid-19,” McKinsey & Company noted.
Before the pandemic, cargo typically made up around 12% of the sector’s total revenue; that percentage tripled last year.
Based on data from the Airline Analyst, only 21 (down from 77 in 2019) of the airlines around the world that disclosed their operating performance achieved positive operating profits for the third quarter of 2020, traditionally the industry’s most profitable quarter.
Among these 21 airlines, cargo revenue accounted for 49% of total revenues on average.
During the pandemic, e-commerce sales soared while many passenger flights – which are responsible for delivering around half of total air cargo – were grounded. As a result, cargo yields increased by about 30% last year. As commercial flights gradually return, belly supply will increase, although not to pre-Covid-19 levels for at least a few years, as the industry is expected stay smaller than before the pandemic for several years.
Aviation is a vector of globalisation, which has lifted a billion people from poverty since 1990. No wonder, aviation is closely linked to most of the UN’s Sustainable Development Goals.
Therefore, by helping airlines thrive, we are helping global economy grow and provide the much-needed jobs and relief to billions around the world.

* Pratap John is Business Editor at Gulf Times. Twitter handle: @PratapJohn

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