Hello everyone, 2020 is coming to an end. This year, air transportation has been affected by the epidemic, and the entire aviation industry has been sluggish. Many airlines have been hit unprecedentedly. Throughput and profit fell sharply from the previous year. Of course, there may be many freight forwarders who also seized the opportunity of the epidemic in the first half of the year and made a profit. However, the next situation is still not optimistic.
IATA also launched its annual report at this time, analyzing consumers, macroeconomics, investors, fleet numbers, fuel indices, employment, and infrastructure. Today, we will share the overall situation of 2020, and by the way, boldly predict the situation in 2021. While sharing IATA content, I will give my own comments and thoughts (I don’t fully agree with IATA).
The following content, screenshots, and data are from the IATA official website. The full text is in English. In order to make it easier for everyone to see, I have translated it myself, and the yellow font is my own idea.
Overview
●COVID-19 has weakened air capacity and the resulting economic benefits. It’s recovering now, but it’s still down by a third.
● Air cargo, which underpins global supply chains, will return to 2019 levels next year , but air travel will take years.
●Supported by a vaccine and effective testing, it is expected to be able to restore global travel levels to around 50% of 2019 levels next year, with significant progress in the second half of next year.
● Airlines have been slashing costs, but cash burn is expected to continue into the fourth quarter of next year.
● The industry is expected to post a net loss of $118 billion this year, reducing those losses to $38 billion by 2021.
● Some airlines have large cash reserves to survive until strong revenue growth in the second half of next year. But many airlines don’t have enough cash reserves.
● Airlines typically pay the government $111 billion in taxes each year, but the total required to produce vaccines, equipment and more to fight COVID-19 is $173 billion.
●The financial performance of airlines is expected to recover first in the Asia-Pacific region, followed by airlines in developed market regions.
Karron: Looking at the global aviation market, the losses in the Asia-Pacific region affected by the epidemic are relatively small. Therefore, it is not surprising that the aviation industry can take the lead in recovering in the Asia-Pacific region. However, if the epidemic is not well controlled in other regions, all flights can only be operated within the region, and cannot be expanded globally. At the same time, I am skeptical that freight will be able to recover to 2019 levels next year. The outlook for freight will not jump out of economic activity and become active on its own as global economic activity declines.
Consumer
The airline industry has actually been suppressed by COVID-19, and the recovery in most markets has slowed due to travel restrictions. A deep recession and weak consumer confidence also hampered the recovery. Global RPK (Revenue Passenger Km) is forecast to drop by 66% in 2020, the largest drop since World War II.
The vaccine is expected to be available by the second half of 2021, which will be a tipping point, but the recovery will be gradual as the phased distribution of the vaccine will take time. Global RPK is expected to increase by 50% in 2021, following a sharp decline in 2020. Consumers will face lower real travel costs as airlines continue to slash airfares to stimulate demand. We expect the global share of GDP in air transport to be 0.5% in 2021, half its pre-crisis level. On the other hand, world trade is expected to rebound strongly in 2021, which will support air cargo volumes.
Industry sentiment on the outlook for air passenger travel and cargo has improved after the initial lockdown period. However, respondents’ views were mixed. While half of the respondents expect passenger demand to recover due to effective coordination and gradual opening of the network, the other half expect passenger demand to deteriorate further as the pandemic continues.
Karron: Also yes, I am skeptical of the claim that world trade is expected to rebound strongly in 2021, which will support air cargo volumes. Reducing air ticket prices can indeed stimulate demand, but if the global epidemic control does not reach an ideal level, it will still greatly limit the confidence of travelers to travel. It is undeniable that there will still be a strong demand for charter flights next year, but in order to survive, major airlines will increasingly convert passenger aircraft to freighter aircraft in the face of reduced passenger demand. This will lead to the formation of a competitive relationship between the companies that are originally chartered and remodeled freighter companies.
Macroeconomics
Air transport is key to the development of the global economy. Both direct links between cities and falling air transport costs have underpinned macroeconomic benefits, enabling the flow of goods, people, capital, technology and ideas. However, COVID-19 has caused a significant loss of connectivity between cities. By the end of October, the number of city pairs was down 33% year-over-year, and we do not expect that connectivity to recover for the remainder of the year. As a result, for the first time since the global financial crisis, connectivity in cities will decline. There is also a risk that the number of urban connections will not be fully restored, which would offset the gains of recent years.
Air transport is critical to the international trade of manufactured goods, but is especially important for the components industry, which accounts for the majority of cross-border trade today. We forecast that the value of international air transport will reach $5.8 trillion this year, a 10% decrease from 2019. However, by 2021, it will surpass 2019 levels. Tourists traveling by air are expected to spend $347 billion in 2020, down 59 percent from the previous year. Tourists traveling by air are expected to spend $559 billion next year, equivalent to 2012 levels. Another downside of the crisis will be employment. The total number of jobs supported by the air transport sector (direct and indirect) is forecast to fall to 42.8 million in 2020; a 51% decrease compared to 2019.
Karron: The impact of the aviation industry has already occurred, and indeed many airlines have gone bankrupt or are on the verge of bankruptcy. The news of airline collapses is endless. Layoffs, salary cuts, salary freezes, etc. are also things that the industry often talks about this year. That being said, air cargo doesn’t stop doing it. Only some companies will be eliminated. In 2021, air transport with innovative thinking will create a new scene. How to break the deadlock shrouded in the epidemic will become the core idea of airlines and even freight forwarders.
Investor
Historically, debt providers in the aviation industry have been rewarded for their capital, typically investing in backed by highly mobile aircraft assets. On average, in previous business cycles, the airline industry was able to generate enough revenue to pay its suppliers’ bills and service its debts. On the other hand, even before the COVID-19 crisis, investors were not getting adequate returns even when they risked diversifying across all regions. Under normal circumstances, investors should expect at least the return generated by an asset with a similar risk profile; the weighted average cost of capital (WACC). With such intense competition and challenges to the business, airlines’ average returns rarely reach the level of the industry’s cost of capital. That said, for North America and Europe, equity investors have been rewarded more than the cost of capital for the past four years.
On the other hand, airlines in Asia Pacific and Latin America consistently generate lower-than-WACC earnings. Intense competition in the Asia-Pacific market has prevented airlines from fully reflecting rising costs, resulting in lower operating margins. With COVID-19, things have changed a lot. The unprecedented drop in air passenger traffic has had a severe impact on all regions. We forecast that the industry will generate an overall negative ROI (-17.7%) in 2020. North America and Europe were the top performers of all regions prior to the crisis, with negative double-digit ROI expected in 2020. We expect airline margins to come under pressure in 2021 as airlines continue to struggle to reduce costs to accommodate lower revenues. We expect a modest improvement due to a gradual recovery in demand conditions, but expect ROIC (Return on Capital Invested) to remain in negative territory. North America and Asia, supported by their large domestic markets, are expected to recover faster than other regions, which will be reflected in their ROIC, with these two regions performing relatively better than the rest.
Karron: Overall, I expect passenger throughput to remain bleak in 2021. ROIC should indeed be negative as well. Airlines, especially national airlines, will rely on state subsidies to maintain operations. And the recovery of North America, huh, depends on whether Comrade Chuan Jianguo wants to kill the American people. This comrade often speaks wildly, leading the wrong public opinion, causing other countries to be passively forced to follow suit. Remember when he asked Americans to drink plain water? Really got water in my head.
Number Of Fleets
In 2020, commercial airlines are expected to take delivery of 800 new aircraft. That’s about half the amount planned earlier this year. The airline currently plans to take delivery of 1,302 new planes in 2021, which is close to the number of deliveries in 2019. However, given the extremely challenging industry outlook, we expect airlines to consider further cancellations or delays. Going forward, it is very likely that capital investment in new aircraft will continue to be low. This is also because the industry predicts that the industry will not return to pre-pandemic levels before 2024.
Plans to retire the aircraft are expected to accelerate in 2021. While low oil prices would reduce the odds of retrieving older aircraft under normal circumstances, under current business conditions airlines will consider decommissioning or putting their older aircraft in storage as the market won’t return to pre-pandemic levels until 2024. Overall, the increase in fleet retirements will be described below.
The in-service fleet is expected to shrink to 24,500 aircraft this year. Airlines will focus on short- and medium-haul travel, and the average size of aircraft in airline fleets will also decline. Therefore, by the end of 2020, we estimate that there will be approximately 3.4 million available seats, a decrease of 23% from 2019. In addition, passenger occupancy is expected to drop significantly in 2020 and slowly recover in 2021, with weak traveler confidence.
Karron: PwC also predicts that it will be difficult to restore previous industry levels before 2024. In order to reduce operating costs, airlines are indeed likely to put planes back into hangars. At this time, the drop in the price of jet fuel will stimulate the growth of the cargo fleet.
Fuel Index
This year, we forecast that industry fuel bills will decrease to $55 billion, or about 13% of average operating costs. The drop reflects poor traffic (kilometers flown) due to falling demand and a sharp drop in fuel prices. As demand and fuel prices recover, we expect airline fuel bills to increase to $78 billion in 2021. We expect the jet fuel crack spread to turn negative in the second quarter of 2020 by the second quarter of 2020. Our forecast is based on Brent crude oil prices of $45.5/bbl and 2021 average airline prices of $49.1/bbl.
Fuel is a huge cost to airlines, so it’s the focus of a huge industry-wide effort to improve efficiency. Those gains can take many forms, including replacing fleets with new aircraft, improving operational efficiencies, and efforts to persuade governments to eliminate inefficiencies in airspace and airports, which would waste about 5 percent of fuel each year.
We forecast a 2.0% improvement in fuel efficiency per ATK in terms of capacity usage in 2020 and 2021 as older aircraft are scrapped or put into storage. CO2 emissions in 2020 are expected to be 47% lower than in 2019, as the bulk of the industry ends throughout the second quarter and capacity has not fully recovered. In 2021, CO2 emissions will rise as the use of fuel-efficient aircraft increases and air transport services slowly recover, but they are still expected to be 33% lower than pre-crisis levels.
Karron: The drop in jet fuel prices has already been reflected this year. If jet fuel is higher next year, it will make the aviation industry even worse.
Employment Status
Airlines are under pressure to limit cash burn, which is expected to continue into 2021. Total employment in the airline industry is also under increasing pressure as air travel has not recovered quickly. We estimate that total airline employment will drop to 1.9 million in 2020, with a slight improvement in 2021. Productivity may decline, with the average employee generating 448,328 ATK per year. Wages in the industry will fall, but airline profit margins will continue to be squeezed despite falling unit labor costs.
The jobs created are not only productive for their airline employers. They are also highly productive for the economies in which they are used. However, COVID-19 offsets this advantage. We estimate that the direct GVA of the national economy, generated by the average airline employee, will fall 34.9% from 2020 to $64,344, but will improve to $85,434 in 2021.
Karron: Indeed, due to operational pressure, airlines have to implement various practices to increase revenue and reduce expenditure to reduce the phenomenon of “burning money”. After all, operating an airline is not excessive in terms of “burning money”. Many small partners think that airlines are very profitable, but they are not. Increasing operational pressure and falling profit margins will continue to weigh on airlines. Especially in highly competitive regions like Asia Pacific.
Infrastructure
Partners in infrastructure play an important role in the service an airline provides to its customers, and the quality of the infrastructure will affect the experience, the timeliness of the journey and its cost. The direct costs of using infrastructure have increasingly been passed on to airlines and passengers. Overall, the cost of using airport and ANSP infrastructure has risen dramatically over the past few decades, in part due to very weak competitive pressure (lack of competition) across the supply chain for companies providing the infrastructure. This contrasts with the relatively limited increase in non-fuel airline costs.
The drop in infrastructure costs was modest compared to the drop in passenger traffic. While global passenger traffic is expected to contract by 60.5%, in 2020, the total cost of infrastructure use is expected to decline by a lesser extent (-45.4%), increasing unit costs. Before the start of the COVID-19 crisis, airspace in Europe was significantly less efficient.
Flight delays are calculated by calculating the total number of minutes delayed. The number of flights has dropped due to the spread of the epidemic in Europe, so the delay rate has also dropped sharply. In the coming period, a key challenge will be improving airspace inefficiencies while flights are gradually resuming.
Karron: Airspace utilization also affects flight profitability. Just imagine how many flights are there a day at JFK Airport? Check out FlightRadar24, the whole airport is full of planes. The higher the number of flights taking off and landing per minute, the higher the utilization rate. However, the impact of the epidemic is on airline sales, and it has little impact on partners who provide infrastructure. Anyway, the money is taken. So when airline profit margins are falling, even if infrastructure costs remain the same, it is a disguised increase in costs. As for the reduction in delays, it is because there are not many flights!
Area
The COVID-19 pandemic has put unprecedented pressure on airlines, and the aviation industry in all regions faces a long road to recovery. Net losses will continue to widen in 2021, albeit narrowing in all regions.
North American airlines were the strongest performers before the crisis, with an estimated net loss of $45.8 billion in 2020. Nonetheless, North America’s recovery in 2021 is expected to be rapid compared to other regions. Net profit margin will improve to –6.8% from –41.4% in 2020. The presence of a large domestic market in the US will drive this improvement. Europe’s recovery will be more sluggish due to a slowing economic recovery and the importance of international services. A net loss for the region is estimated at $26.9 billion in 2020, as a second wave leads to new travel restrictions, hampering intra-regional travel in Europe. Net losses are expected to reach $11.9 billion in 2021, or 12% of forecast revenue.
The Asia-Pacific region was the first region exposed to the COVID-19 outbreak, where the recovery began. The Asia-Pacific region is expected to benefit from a recovery in large domestic markets such as China and India, as well as a strong economic rebound in China. The Chinese domestic market has recovered to pre-crisis levels in 2020. While airlines are lowering fares to stimulate demand, they are expected to break even by the end of the year. In addition, Asia Pacific, a manufacturing hub, benefited from rising freight revenue. Overall, the net loss in 2021 is expected to fall to $7.5 billion, almost a quarter of the 2020 loss.
Middle Eastern airlines are facing the crisis, and some of them are transitioning through restructuring that includes a planned slowdown in capacity growth. Losses for Middle Eastern airlines are expected to increase to $7.1 billion in 2020 after the fallout from the pandemic. The region’s airlines’ reliance on international flights and the lack of a large domestic market will delay the region’s recovery. By 2021, the net loss margin will be in the double digits (–10.8%).
In Latin America, the performance of airlines prior to the financial crisis was mixed, with some airlines already facing a downturn, now coupled with COVID-19, which has further impacted home service. Improvements are expected to be slow in 2021, with the region expected to post a net loss of $3.3 billion in 2021.
Karron: South America is actually not that bad, at least we still have goods to go to South America now. Its domestic demand cannot be driven, and it must rely on external input to promote the economy. Of course, the disparity between the rich and the poor in the local area also makes the performance of the local aviation industry up and down.
