Tuesday, March 19, 2024
HomeNEWSAIRLINESIATA forecasts airlines are cutting losses

IATA forecasts airlines are cutting losses

-

DOHA, 21 June 2022: The International Air Transport Association (IATA) announced an upgrade to its outlook for the airline industry’s 2022 financial performance as the pace of recovery from the Covid-19 crisis quickened.

Forecast highlights

Industry losses are expected to reduce to -USD9.7 billion (improved from the October 2021 forecast for a USD11.6 billion loss) for a net loss margin of -1.2%. That is a huge improvement from losses of USD137.7 billion (-36.0% net margin) in 2020 and USD42.1 billion (-8.3% net margin) in 2021.

Industry-wide profitability in 2023 appears within reach, with North America already expected to deliver a USD8.8 billion profit in 2022.

Efficiency gains and improving yields are helping airlines to reduce losses even with rising labour and fuel costs (the latter driven by a +40% increase in the world oil price and a widening crack spread this year).

Industry optimism and commitment to emissions reductions are evident in the expected net delivery of over 1,200 aircraft in 2022.

Strong pent-up demand, the lifting of travel restrictions in most markets, low unemployment in most countries, and expanded personal savings are fueling a resurgence in demand that will see passenger numbers reach 83% of pre-pandemic levels in 2022.

Despite economic challenges, cargo volumes are expected to set a record high of 68.4 million tonnes in 2022.

“Airlines are resilient. People are flying in ever greater numbers. And cargo is performing well against a backdrop of growing economic uncertainty. Losses will be cut to $9.7 billion this year, and profitability is on the horizon for 2023. It is a time for optimism, even if there are still challenges on costs, particularly fuel, and some lingering restrictions in a few key markets,” said IATA’s director general Willie Walsh.

Outlook Drivers

Revenues are rising as Covid-19 restrictions ease, and people return to travel. The challenge for 2022 is to keep costs under control.

“The reduction in losses results from hard work to keep costs under control as the industry ramps up. The improvement in the financial outlook comes from holding costs to a 44% increase while revenues increased 55%. As the industry returns to more normal production levels and high fuel costs likely to stay for a while, profitability will depend on continued cost control. And that encompasses the value chain. Our suppliers, including airports and air navigation service providers, need to be as focused on controlling costs as their customers to support the industry’s recovery,” said Walsh.

Revenues

Industry revenues are expected to reach USD782 billion (+54.5% on 2021), 93.3% of 2019 levels. Flights operated in 2022 are expected to total 33.8 million, which is 86.9% of 2019 levels (38.9 million flights).

Passenger revenues are expected to account for USD498 billion of industry revenues, more than double the USD239 billion generated in 2021. Scheduled passenger numbers are expected to reach 3.8 billion, with revenue passenger kilometres (RPKs) growing 97.6% compared with 2021, reaching 82.4% of 2019 traffic. As pent-up demand is released with the easing of travel restrictions, yields are expected to rise by 5.6%. That follows a yield evolution of -9.1% in 2020 and +3.8% in 2021.

Expenses

Overall expenses are expected to rise to USD796 billion. That is a 44% increase in 2021, which reflects both the costs of supporting larger operations and the cost of inflation in some key items.

Fuel: At USD192 billion, fuel is the industry’s largest cost item in 2022 (24% of overall costs, up from 19% in 2021). This is based on an expected average price for Brent crude of USD101.2/barrel and USD125.5 for jet kerosene. Airlines are expected to consume 321 billion litres of fuel in 2022 compared with the 359 billion litres consumed in 2019.

War in Ukraine is keeping prices for Brent crude oil high. Nonetheless, fuel will account for about a quarter of costs in 2022. A particular feature of this year’s fuel market is the high spread between crude and jet fuel prices. This jet crack spread remains well above historical norms, mainly owing to capacity constraints at refineries. Under-investments in this area could mean that the spread remains elevated into 2023. At the same time, high oil and fuel prices are likely to see airlines improve their fuel efficiency—both through the use of more efficient aircraft and through operational decisions.

Labour: Labour is the second-highest operational cost item for airlines. Direct employment in the sector is expected to reach 2.7 million, up 4.3% on 2021, as the industry rebuilds from the significant decline in activity in 2020. Employment is still, however, somewhat below the 2.93 million jobs in 2019 and is expected to remain below this level for some time. Unit labour costs are expected to be 12.2 cents/available tonne-kilometre (ATK) in 2022, which is essentially back to 2019 levels when it was 12.3 cents/ATK.

The time required to recruit, train, complete security/background checks, and perform other necessary processes before staff are “job-ready” is presenting a challenge for the industry in 2022. In some cases, employment delays may act as a constraint on an airline’s ability to meet passenger demand.

Risk Factors

The impact of the war in Ukraine on aviation pales compared with the unfolding humanitarian tragedy. The outlook assumes that the war in Ukraine will not escalate beyond its borders. Among the many negative impacts of an escalation for aviation, rising fuel costs and a dampening demand due to lowered consumer sentiment would be paramount.

Passenger: Combined, the Russian international market, Ukraine, Belarus, and Moldova, accounted for 2.3% of global traffic in 2021. In addition, about 7% of international passenger traffic (RPK) would normally transit Russian airspace (2021 data), which is now closed to many operators, mostly on long-haul routes between Asia and Europe or North America. There are significantly higher costs for re-routing for those carriers affected.

Covid-19

The underlying demand for travel is strong. But government responses to Covid-19 ignored the World Health Organization’s advice that border closures are not an effective means of controlling the spread of a virus. The outlook assumes that strong and growing population immunity to Covid-19 means there will not be a repeat of these policy mistakes. There is, however, downside risk should governments return to knee-jerk border-closing responses to future outbreaks.

“Governments must have learned their lessons from the Covid-19 crisis. Border closures create economic pain but deliver little in terms of controlling the spread of the virus. With high levels of population immunity, advanced treatment methods, and surveillance procedures, the risks of COVID-19 can be managed. At present, there are no circumstances where the human and economic costs of further COVID-19 border closures could be justified,” said Walsh.

China

China’s domestic market alone accounted for about 10% of global traffic in 2019. This outlook assumes a gradual easing of Covid-19 restrictions in the second half of 2022. An earlier move away from China’s zero Covid policy would, of course, improve the outlook for the industry. A prolonged implementation of the Covid-19 policy will continue to depress the world’s second-largest domestic market and wreak havoc with global supply chains.

Asia-Pacific airlines, strict and enduring travel restrictions (notably in China), along with an uneven vaccine rollout, have seen the region lag in the recovery to date. As the restrictions diminish, travel demand is expected to increase quickly. Net losses in 2022 are forecast to decline to USD8.9 billion. Demand (RPKs) is expected to reach 73.7% of pre-crisis (2019) levels and capacity at 81.5%.

Must Read

Consensus 2025 to visit Hong Kong

0
HONG KONG, 19 March 2024: Hong Kong has won the bid to host Consensus, a cryptocurrency and Web 3 event that will meet in...

KAL boosts summer flights