We all agree that 2020 was a significantly difficult year for everyone around the world to say the least, but there are some sectors that were hit harder than others. Out of all the hard-hit industrial and business sectors, the aviation industry took the hardest hit. With major airlines facing losses, a large number of employees were laid off, while manywere asked to go home without pay and others faced salary cuts. In 2020, industry revenues totalled $328 billion, around 40 percent of the previous years. The sector is also projected to have slow growth and will only register 2019 numbers by 2024. Keeping the financial woes aside, the long-term effects of Covid-19 on the aviation industry is slowly emerging. The obvious ones being concerns regarding hygiene and safety, which will definitely become more strict.
Additionally, digitisation is also expected to continue to transform the travel experience. Mobile apps will be used to store travelers’ vaccine certificates and Covid-19 test results. Some other effects that might be observed are going to be more profound. Unlike the 2008 global financial crisis, which was purely economic and weakened spending power, Covid-19 has left lasting effects and has irrevocable implications on consumer behaviour.
It is also clear that the Covid-19 pandemic has impacted the world way beyond the aviation sector. Since the pandemic started more than 2.7 million people have died worldwide. Apart from the human tragedy, the crisis has also resulted in dramatic damage to the global economy, trade, and mobility.
Practically all aspects of economic and social activity were, and are still, disrupted. The health, safety and well-being of passengers and staff is the aviation industry’s number one priority. In order to follow through, airports around the world have introduced many new health and biosafety measures to ensure the safety of the passengers and that their efforts directly reflect and match with the current consumer trend. Airports and airlines along with the world have come together to resume global connectivity. At present, rate of global vaccinations offers a beacon of hope that a return to normality is a possibility in the near future.
One of the most important points to keep in mind while supporting a sustainable recovery will be the establishment of an interoperable health data trust framework that will ensure a safe border reopening and cross-border travel. But it is also important to remember that even though there are positive signs of recovery, Covid-19 still remains an existential crisis for airports, airlines and their commercial partners.
Covid-19 and its effect on air control traffic
Last year marked the end of ten years worth of consistent growth in global passenger traffic. The ongoing pandemic managed to bring the airport around the world to a virtual halt in the second quarter of 2020, resulting in airport traffic revenue losses across all regions. While many countries have since then started to gradually reopen many parts of their economy, many states were confronted with more brutal waves of infection and several states and countries decided to reimpose lockdown measures to control the spread of the virus.
Countries like France, Poland, Canada, India, and Chile had to increase or re-instate partial lockdowns in an effort to control the spread of a second, third or even fourth wave of infection. While most countries have moved away from complete lockdowns, and currently they are trying to limit the infections with targeted and less disruptive restrictions, there are a large number of states and countries that have retained either partially or totally restrictive regulations for international travel including self-quarantine on arrival. 2020 represented a 64.6 percent decline in global passenger traffic compared to 2019. Europe and the Middle East were the two most impacted regions with similar declines of 5 percent compared to the projected baseline.
The Asia-Pacific region started recovery earlier and faster than other regions, primarily being driven by and ended the year by registering a decline of 61.3 percent Asia-Pacific, however, recorded the highest traffic loss of all regions with a loss of 2.15 billion passengers in 2020. Comparatively, Latin America-Caribbean was the least impacted of all regions posting a decline of 61.1 percent. After the ‘great lockdown of 2020’, international passenger traffic was virtually non-existent in the second half of 2020 and international passenger volume ended with below 1 billion passengers, which is 75 percent less compared to 2019. Globally, domestic traffic volume for 2020 was recorded slightly above 2.4 billion passengers, a decline of 54.7 percent compared to 2019 volume.
Leisure trips will fuel the recovery
While it’s a given that business trips will take longer than usual, and even then, it’s estimated that it will only recover to around 80 percent of pre-pandemic levels by 2024. Factors like remote work and other flexible working arrangements are likely to remain in some form post pandemic and, because of that, people will take fewer corporate trips. Compared to previous crises, leisure trips or visits to friends and relatives recovers faster, as it has been observed before in the US following 9/11 and the global financial crisis.
Not only did business trips take four years to return to pre-crisis levels after the attacks, they also had not yet recovered to pre-financial-crisis levels when Covid-19 hit in 2020. Therefore, experts estimate that as the pandemic subsides, the rise in leisure trips will outpace the recovery of business travel. There are some air carriers that depend a lot on business travellers, both of whom book business class and economy class tickets before travelling. While leisure passengers fill up most of the seats on flights and help cover a portion of fixed costs, their overall financial contributions in net marginal terms are negligible, if not negative. The majority of the profit earned during a long-haul flight are generated by a small group of high-yielding passengers, often traveling for business. But this has shrunk significantly due to Covid-19.
Air ticket prices are expected to increase
As the pandemic hit, a lot of air carriers had to borrow money to stay afloat and cope with high daily cash burn rates. The airlines industry collectively amassed more than $180 billion worth of debt in 2020, which is ironically very close to the amount of revenue collected that year. And with debt levels still rising, it has become even more difficult to repay those loans back. In order to recuperate these costs, ticket prices are going to get higher. Experts estimate that ticket prices are going to rise by 3 percent and as air travel slowly returns to normal, it will likely outpace supply initially. But it will also take time for airlines to restore capacity, and this will bring in delay in bringing aircraft back to service and crew retraining might result in a demand gap, resulting in higher short-term prices. For some other cases, airline rescue efforts provided by the country’s government come with strings attached. We are already witnessing a reemergence of, or increase in, the level of state ownership and influence. For example, TAP Air Portugal, Lufthansa Group, and AirBaltic all received state aid along with an increase or reintroduction of government shareholdings.
Effect on airport revenues
As mentioned above, air traffic is the lifeblood of the aviation industry. Airports generate more than 95 percent of all revenue from aeronautical and non-aeronautical services, and all aeronautical revenues are a direct function of traffic and include passenger-related charges from passengers and aircraft-related charges from aircraft operators. Given the drastic decline in air traffic, the avenue to collect the above mentioned charges declined significantly.
In September 2020, the Air Transport Action Group (ATAG) estimated that Covid-19 crisis will result in the loss of 46 million aviation-supported jobs along with a reduction of $1.8 trillion USD in economic activity. The airport industry was expected to generate about $188 billion before Covid-19 outbreak happened. The second quarter of 2020 alone contributed to a reduction of close to $43.5 billion in revenues. The air traffic in the Middle East and Europe was affected the worst. Europe recorded an estimated revenue shortfall of 4 billion for 2020 and the Middle East recorded a reduction of 70.5 percent of their revenues.
Experts estimate that this shortfall is going to leave a lasting impact on airport revenues. Experts estimate that globally, airports will suffer the loss of more than $94 billion of revenues by year end of 2021 cutting in half airport revenue expectations. Additionally, it is expected that every quarter of 2021 will show improvements compared to the previous one, moving from a decline of 7 percent in the first quarter of 2021 to a decline of 35.2 percent in the fourth quarter. Europe is still estimated to remain affected with an estimated loss of revenues of more than $4 billion by the end of 2021. Asia-Pacific will record the strongest recovery, reaching 59.7 percent of the projected baseline.
Air freight is likely to witness undersupply for some time
For the last decade, many airline carriers have scaled back their dedicated cargo freighter fleets because of low cargo rates and the unprofitability of the cargo business. But cargo became one of the most indispensable arms of the aviation industry during the Covid-19 crisis. Before the pandemic, cargo typically made up around 12 percent of the sector’s total revenue, but that number tripled last year. Based on data from the Airline Analyst, only 21 airlines around the world that disclosed their operating performance achieved positive operating profits for the third quarter of 2020 and they accounted for 49 percent of total revenues. During the pandemic, e-commerce sales shot up and because of this, cargo yields increased by about 30 percent last year. As commercial flights slowly return to their normal pace, the industry is expected to stay smaller than before the pandemic for several years.
Responding to high demand and low supply of air freight right now, carriers might look into short- to medium-term opportunities to boost their cargo services. Airlines can become more flexible through measures such as increasing the deployment of preighters or passenger airplanes that are used to transport cargo. Airlines also have the option to explore freighter conversions, especially as their passenger fleets reduce in number. Experts advised airlines to be flexible as operating and maintaining a large freighter fleet again comes with risk. Airlines have to build up their cargo fleet strength in an agile way that allows for quick adjustments. This can be achieved by establishing a more flexible production setup.
The impact of Covid-19 on the aviation industry is far from over. While there is some improvement in the sector due to the vaccination programme, the road to recovery for air traffic will take several years. The picture of a pos-Covid-19 aviation sector is becoming clearer and holds lessons for airlines today. Digitisation and phasing out of less efficient aircraft will become more common. Additionally, a large number of airlines are burdened with debt and have depleted their cash reserves. But, on a positive note, air travel is expected to become greener and more efficient, and people are itching to travel again for holidays. If necessary steps are taken now, it will help airlines thrive in this transformed sector.
Surge in travel for the second half of 2021
Currently, we are undergoing the biggest vaccination campaign that we have ever witnessed and we are seeing some positive signs and prospects of recovery. With the Covid-19 pandemic slowly subsiding, travellers and industry stakeholders are eager to resume traveling. Additionally, industry experts have also forecast a surge in travel for the second half of 2021, with some terming the comeback of the aviation industry with a “post-war like surge” in travel.
Even then, there has been a lot of uncertainty surrounding the recovery of the aviation sector. It is imperative that governments around the world have to learn to strike the balance between supporting the airline industry and how to preserve conservation by taking firm-specific measures. But it is important to keep in mind that government interventions can have ambiguous effects on competition. With an effective vaccination campaign largely distributed in the second half of 2021, an added enthusiasm from passengers to start flying again in the second half of 2021, will also aid recovery. Third and fourth waves of infections are possible but rapidly contained and limited to specific regions. But, the fear to travel is still largely present among the population, along with prolonged economic downturn and slow airline fleet recovery. Third and fourth waves of infections are likely and could spread to multiple regions.
Based on these points, it is predicted that global passenger traffic is now expected to recover to 2019 levels in 2024 and, most of it will be driven by the recovery of domestic passenger traffic. Globally, domestic traffic accounts for 58 percent of total passenger traffic as of 2019. If new variants of the virus are effectively contained, even then, it will take airlines at least 2023 to recover to the 2019 levels. The recovery of international passenger traffic will require one more year, thus getting back to 2019 levels only in 2024. In the long run, it is predicted that the global traffic may take up to two decades to return to previously projected levels.