Cost cutting alone can’t do it
The air travel market has plummeted to such an extent, that no matter how much airlines cut their costs, they are not able to sufficiently neutralize severe cash burn to avoid bankruptcies and preserve jobs in 2021, according to the International Air Transport Association (IATA).
In its bleak overview of the airline industry fighting the downturn in air travel due to the pandemic, IATA reiterated its call for government relief measures to sustain airlines financially and avoid massive employment terminations.
IATA represents some 290 airlines comprising 82 percent of global air traffic.
The association also called for pre-flight COVID-19 testing to open borders and enable travel without quarantine.
Total industry revenues in 2021 are expected to be down 46 percent compared to the 2019 figure of US$838 billion according to an IATA news release.
That is even worse than previous analysis which predicted that 2021 revenues would be down by about 29 percent compared to 2019. But that was based on expectations for a demand recovery commencing in the fourth quarter of 2020 — no longer possible thanks to new COVID-19 outbreaks, and government mandated travel restrictions including border closings and quarantine measures.
IATA says it expects full year 2020 traffic to plunge by 66 percent compared to 2019, with December demand down by 68 percent..
“The fourth quarter of 2020 will be extremely difficult and there is little indication the first half of 2021 will be significantly better, so long as borders remain closed and/or arrival quarantines remain in place,” Alexandre de Juniac, IATA’s Director General and CEO said.
“Without additional government financial relief, the median airline has just 8.5 months of cash remaining at current burn rates. And we can’t cut costs fast enough to catch up with shrunken revenues,” he added.
“The handwriting is on the wall. For each day that the crisis continues, the potential for job losses and economic devastation grows. Unless governments act fast, some 1.3 million airline jobs are at risk,” he said.
But the situation is even worse than that.
“And that would have a domino effect putting 3.5 million additional jobs in the aviation sector in jeopardy along with a total of 46 million people in the broader economy whose jobs are supported by aviation.
“Moreover, the loss of aviation connectivity will have a dramatic impact on global GDP, threatening US$1.8 trillion in economic activity.,” de Juniac said.
Airlines are in a difficult position, because although they have taken drastic steps to reduce costs, around 50 percent of their of costs are mainly fixed. As a result cost reductions cannot keep pace with the fall revenues.
During the second quarter, for example, the year-on-year decline in operating costs was 48 percent but that paled into significance against the 73 percent decline in operating revenues — according to a survey of 76 airlines.
And then because of reduced capacity, unit costs have actually increased by about 40 percent compared to the previous year.
To date, with international demand down by almost 90 percent, airlines have parked thousands of mostly long-haul aircraft and shifted operations to short haul flying. However, because the average distance flown has fallen sharply, more aircraft are required to operate the network.
“There is little good news on the cost front in 2021. Even if we maximize our cost cutting, we still won’t have a financially sustainable industry in 2021,” de Juniac said.
“Governments must take firm action to avert this impending economic and labor catastrophe. They must step forward with additional financial relief measures. And they must use systematic COVID-19 testing to safely re-open borders without quarantine,” said de Juniac.