Rough landing: 2020 will be a terrible year for air transportation | Article – HSBC VisionGo

The unprecedented slump in international travel will make 2020 a terrible year for the air transportation industry.

Perspectives  ·    ·  3 mins read

  • Global demand in air transport will not return to its pre-Covid-19 level before 2023. The unprecedented slump in international travel will make 2020 a terrible year for the air transportation industry: We expect airlines’ aggregate revenues to plummet by USD310bn to USD525bn and profitability to become negative with a staggering USD60bn operating loss. Though lockdowns are now gradually being lifted and borders are starting to re-open, our central scenario anticipates a progressive exit lasting another six months, leading to a U-shaped recovery in 2021. As a result, demand in global air transport should fall by -37% (4q/4q) in 2020 before rebounding by +39% and +10% in 2021 and 2022, respectively. 
  • Up to 30% of the workforce in the sector is at risk of looming layoffs. Airlines have had no choice but to take urgent measures to curb cash outflows in the short run, including grounding planes, temporary furloughs and postponing ticket refunds for cancelled flights. In spite of these steps, as well as massive state support to the tune of USD125bn, additional restructuring measures can’t be avoided in the second half of 2020. In the U.S., for example, deep job cuts are coming after October 1 as the federal bailout for the airline industry covers around two-thirds of overall labor costs through September. Up to a third of the sector’s jobs - roughly 750,000 pilots, flight attendants, baggage handlers, mechanics and others - could disappear.  
  • The legacy of the outbreak is likely to reshape supply. The Covid-19 crisis is a major blow to private low-cost airlines, which depend on full flights. Complying with social distancing is likely to hit profitability. We also expect a new wave of consolidation in the industry. Despite sustained financial relief by many governments, already battered players in air transport, especially highly leveraged ones such as those in China, are likely to suffer. As a result, we expect more bankruptcies among air carriers in the next two years, following the recent failures of Virgin Australia, Avianca and Latam airlines.
  • Global air demand could take two years to recover from Covid-19

    In the first quarter of 2020, Covid-19 sparked an unprecedented slump in international tourism (see Figure 1), throwing the global transportation sector into chaos. Air passenger demand nosedived by -53% m/m and by -22% 3m/3m at the end of Q1. For 2020 overall, we expect global air passenger demand to slump by -38% y/y. Global air cargo has suffered slightly less, (-15% m/m and -7% 3m/3m in Q1 2020), likely helped by the urgent need to deliver masks and medical supplies across the globe (see Figure 2). 

    Figure 1: Global air passenger demand and international tourist arrivals (yearly data, in millions)

    Sources: OMT, FactSet, Allianz research, Euler Hermes forecasts

 

Figure 2: Global demand in passenger and freight air traffic (monthly data)
Sources: IATA, FactSet, Euler Hermes, Allianz Research

The year 2020 is expected to be an annus horribilis for the air industry. Our calculations made using a panel of around 80 major airlines show a collapse in revenues of more than USD300bn and a tumble in operating income of more than USD100bn in 2020. Even worse, the operating loss could top a terrible USD60bn this year (see Figure 3). We expect the air sector to retrieve USD205bn and USD75bn of revenues in 2021 and 2022, respectively, following the recovery in the world economy and international tourism. However, this will not make up for all the lost sales in 2020 alone.   

 Figure 3: sales and operating income of the air transport sector

Sources: IATA, FactSet, Allianz Research, Euler Hermes calculations

Though lockdowns are now gradually being lifted around the world and borders are starting to re-open, our central scenario[1] anticipates a progressive exit lasting another six months, leading to a U-shaped recovery in 2021. Combining this GDP trend with historical air traffic data and airlines’ poor activity in the first half of 2020, we find that global demand in air transport will not return to its pre-crisis level before 2023

  • In our U-shaped scenario (see Figure 4), demand in global air transport should fall by -37% (4q/4q) in 2020 before rebounding by +39% and +10% in 2021 and 2022, respectively.  At the very beginning of 2020, before the pandemic, global revenue passenger kilometers reached 2,169. According to our calculations, we expect it to top this level again only by May 2023. 
  • In the case of a second wave of infections, the global economy would face an L-shaped scenario, in which demand in global air transport would not reach its pre-crisis level before mid-2025. It would take years to catch up after a -50% collapse in air transport demand in 2020 alone (4q/4q), especially since this demand would be expected to rise only by +20% and +24% in 2021 and 2022, respectively.  
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Euler Hermes
Euler Hermes