Resilient airline industry to cut losses to $9.7 billion

Business Monday 20/June/2022 17:09 PM
By: Pankaj Sharma [email protected]
Resilient airline industry to cut losses to $9.7 billion
Willie Walsh

Doha: Airline industry losses are expected to reduce to $9.7 billion (improved from the October 2021 forecast for an $11.6 billion loss) and air traffic will return to profit in 2023, according to a new report.

The International Air Transport Association (IATA) at a meeting in Doha announced on Monday an upgrade to its outlook for the airline industry’s 2022 financial performance as the pace of recovery from the COVID-19 crisis quickens.

“Industry-wide profitability in 2023 appears within reach with North America already expected to deliver $8.8 billion profit in 2022,” said Willie Walsh, IATA’s Director-General.
Efficiency gains and improving yields are helping airlines to reduce losses even with rising labour and fuel costs (the latter driven by a 40 per cent increase in the world oil price and a widening crack spread this year), he added.

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

“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,” Walsh said.
“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,” IATA’s Director General added.

Regional round up
In the Middle East, this year’s re-opening of international routes and long-haul flights, in particular, will provide a welcome boost for many, IATA said. “Region-wide, net losses are expected to narrow to $1.9 billion in 2022, from a $4.7 billion loss last year with demand revenue passenger kilometres expected to reach 79.1 per cent of pre-crisis (2019) levels, and capacity 80.5 per cent.”

“Financial performance in all regions is expected to improve in 2022 compared with 2021 (all regions improved in 2021 compared with 2020 as well),” IATA said in its latest report.
North America is expected to continue to be the strongest performing region and the only region to return to profitability in 2022. Supported by the large US domestic market and the re-opening of international markets, including the North Atlantic, net profit is forecast to be $8.8 billion in 2022. Demand RPKs (revenue passenger kilometres) is expected to reach 95.0 per cent of pre-crisis (2019) levels, and capacity 99.5 per cent.

In Europe, the Russia-Ukraine war will continue to disrupt travel patterns within Europe and between Europe and Asia-Pacific. However, the war is not expected to derail the travel recovery, with the region edging closer to profitability in 2022, with a net loss of $3.9 billion forecast. Demand (RPKs) is expected to reach 82.7 per cent of pre-crisis (2019) levels, and capacity at 90.0 per cent.

For 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 $8.9 billion. Demand (RPKs) is expected to reach 73.7 per cent of pre-crisis (2019) levels, and capacity at 81.5 per cent.

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 is the result of 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 per cent increase while revenues increased 55 per cent. As the industry returns to more normal levels of production and with high fuel costs likely to stay for a while, profitability will depend on continued cost control. And that encompasses the value chain,” Walsh said.

“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,” he added.

Industry revenues are expected to reach $782 billion and flights operated in 2022 are expected to total 33.8 million, which is 86.9 per cent of 2019 levels (38.9 million flights).
Passenger revenues are expected to account for $498 billion of industry revenues, more than double the $239 billion generated in 2021. Scheduled passenger numbers are expected to reach 3.8 billion, with RPKs growing 97.6 per cent compared with 2021, reaching 82.4 per cent of 2019 traffic. As pent-up demand is released with the easing of travel restrictions, yields are expected to rise by 5.6 per cent.

Cargo revenues are expected to account for $191 billion of industry revenues. That is down slightly from the $204 billion recorded in 2021, but nearly double the $100 billion achieved in 2019. Overall, the industry is expected to carry over 68 million tonnes of cargo in 2022, which is a record high. As the trading environment softens slightly, cargo yields are expected to fall 10.4 per cent compared with 2021. That only partially reverses the yield increases of 52.5 per cent in 2020 and 24.2 per cent in 2021.

Overall expenses are expected to rise to $796 billion. That is a 44 per cent increase in 2021, which reflects both the costs of supporting larger operations and the cost of inflation in some key items.

At $192 billion, fuel is the industry’s largest cost item in 2022 (24 per cent of overall costs, up from 19 per cent in 2021). This is based on an expected average price for Brent crude of $101.2 per barrel and $125.5 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, mostly 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 is the second-highest operational cost item for airlines. Direct employment in the sector is expected to reach 2.7 million, up 4.3 per cent in 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.

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.

In countries where the economic recovery from the pandemic has been swift and the unemployment rate is low, tight labour markets and skill shortages are likely to contribute to upward pressure on wages. The industry’s wage bill is expected to reach $173 billion in 2022, up 7.9 per cent in 2021, and disproportionate to the 4.3 per cent increase in total jobs, the IATA report said.