The travel industry has been one of the most bearish industries during the COVID-19 pandemic, particularly the airline industry. During the spring of 2020, the airline industry faced a sudden lack of demand due to lockdowns and travel regulations. According to the International Air Transport Association (IATA), Revenue Passenger Kilometres (RPKs), a key metric in the airline industry, is estimated to still be at only 40% of the pre-Covid-19 level in 2021. The IATA, a trade association of the world’s airlines, also estimates that the industry will face a 52 billion USD loss in 2021. However, according to the IATA, these losses are estimated to drop to about 12 billion USD in 2022. The slow recovery of the aviation industry between the 2021 and 2022 estimates is affected by the various changes occurring in the industry customer base.
The Big Four accountancy, PricewaterhouseCooper, estimated that corporate travellers account for around 12% of passengers during a regular year. Although, they can account for up to 75% of total revenue for specific flights. Furthermore, the management consultancy, McKinsey & Company, estimate corporate travel to only recover to about 80% of its pre-Covid-19 level. Since firms are becoming more accustomed to remote working, hybrid working and other flexible work arrangements, it is evident that the shift occurring in the customer base significantly affects the industry. McKinsey & Company evidence their estimate by focusing on the purpose for international flights to and from the UK since the early 2000s, where it took four years for business flights to recover following 9/11. They also find that business flights never fully recovered from the pre-2008 Global Financial Crisis (GFC) level. By comparing the recovery of vacation-focused travel to business flights using recovery from the GFC and 9/11, it is clear that non-business travel has recovered quicker in the past.
Thus, McKinsey & Company expect that non-business travel will recover faster from the pandemic than business flights. The combination of a fast recovery and a growing middle-class, those most likely to fly, especially in developing countries, results in a robust demand side. The newly focused demand-side is estimated to contribute to recovery and long-term growth for the aviation sector.
Despite only accounting for around 12% of the sector’s revenue pre-COVID-19, air freight has seen dramatic growth tripling its sector revenue in 2020. Airbus secured a 408 aircraft order and commitment, including a 255 aircraft order from Indigo Partners, LLC. Thus, expectations and confidence in the growth of the aviation industry are also on the rise after the recent Dubai Air show.
The significant uptake in e-commerce and the need for speed in transporting time-sensitive cargo such as PPE or COVID-19 vaccines have provided a demand for an often too costly transportation methodology. Moreover, the delays and backlogs in ocean shipping and road transportation have increased the attractiveness of air freight. One of the major players in the aerospace industry, Airbus, has forecasted that air cargo traffic will grow at an average of 3.6% per annum according to their much-anticipated Global Market Forecast. Additionally, they predict that around 60% of air freight will be carried by passenger planes as companies seek to optimise space usage and maximise revenues. To capitalise on this growing sector, Airbus announced their new freighter version of its A350 aircraft seeking to match aerospace competitor Boeing who has already received 38 orders for their 777 freighters this year. Airbus’ Global Market Forecast also notes what could be a monumental change in the industry. The accelerated retirement of older, less fuel-efficient models could contribute to the demand for 39,000 new aircraft over the next 20 years. Since the global focus has increasingly been turning towards environmental issues such as climate change, firms within the aviation sector face pressure to reduce their net carbon emissions with newer models. The newer models provide incentives for lower costs through better fuel efficiency, which is an increasingly important factor as fuel prices rise.
The airline industry is known for being cyclical, and although COVID-19 was a downturn, the signs of long-term recovery are promising. Airlines have had the opportunity to restructure their operations, cut costs and realign their focus. Although the short-term forecast for the aviation industry may still appear unclear due to the presence of COVID-19 in Europe, there are still strong indications of long-term recovery. Particularly with the growth of leisure travel, air freight and the demand for new aircraft.
By Jeremy Toussaint
Sector Head: Eric Hardy