< Back to Trader Blog Articles

What’s shaping the airline industry?

23022021

The covid-19 pandemic triggered a series of containment measures, in that, freedom of movement became heavily curtailed. Almost one year since the World Health Organisation declared the covid-19 outbreak a pandemic, and nationwide lockdowns and travel restrictions remain largely in force. In consequence, the sharp contraction in demand for travel has pushed the aviation industry into a crisis, whose turnaround is fully dependent on successful herd immunity and easing of covid-19 restrictions.

During April of last year, the aviation industry experienced the worst contraction in its long-standing history with a drop of 94.3% in revenue passenger kilometres. The International Air Transport Association (IATA) reported that this coincided with the first full month of global lockdowns, when 75% of countries had a ban on inbound flights. The Seat Load Factor, which measures the percentage of seating capacity occupied, also dropped. In the US, the load factor fell from the above 80% pre-pandemic level, to a low point of 36.5% during the second quarter of 2020.

In response to the plunge in travel demand, industry players responded by cutting costs, including reducing staff and capacity, as liquidity buffers came under pressure. Even so, given the high proportion of unavoidable fixed costs within the industry, IATA estimated a cash burn of $51 billion during the second quarter of 2020 alone. Governments also stepped in during this aviation crisis, providing almost $200 billion of support through direct subsidies, loans, equity and cash injections as well as aid through wage subsidies and taxation.

Since the lows of April, the aviation industry is slowly inching towards a recovery. By the end of 2020, passenger traffic was still down by 66%. According to the IATA, this contraction was eight times more than the fall in demand during the 12 months after the 9/11 attacks, the previous most severe aviation crisis. The demand for domestic travel, which fell to a lesser extent at the start of the pandemic, largely captures the pickup in travel so far. Meanwhile, international travel remains subdued, with load factors still at half the levels recorded before the outbreak.

While the discovery of the covid-19 vaccine was a clear catalyst for the industry, the emergence of new variants, first reported in the UK, South Africa and Brazil has hampered the recovery in international air travel. Renewed lockdowns and travel restrictions weighed down on the travel expectations for the first half of 2021, confirmed by a slowdown in booking trends since the start of the year.

Evidently, a more sustainable recovery in the airline industry is dependent on a successful rollout of covid-19 vaccination programs that would facilitate easing of cross-border travel restrictions. In the meantime, domestic travel demand is expected to continue to strengthen, and to shape 2021 returns for the airline industry. Leisure demand is expected to drive the initial rebound, with low cost carriers undoubtedly the first to benefit, given the implicitly shorter routes and better price offerings. Warmer weather in the summer months is also expected to slow down transmission and encourage more travelling. Business travel, on the other hand, is more dependent on the comeback of conferences and a stronger recovery in business operations to fund wider budgets for travel.

The strong rebound in booking trends when covid-19 cases and travel restrictions eased, suggest that a successful vaccine rollout and pent up demand is likely to result in a steep recovery in travel demand. Legacy long haul carriers, stand to benefit from the comeback of international travel as the pandemic is brought under control, an inflection point in the current loss making industry.

In the meantime, effective cooperation and a more digital, contactless and seamless process is required to boost travel confidence. The IATA, which expects air traffic to recover to pre pandemic level in 2024, has proposed a Travel Pass, which incorporates a registry of health requirements, testing and vaccination centres and a lab app with test results or vaccination certificates. The idea going forward is to swap quarantine restrictions with a digital health passport that verifies and shares test and vaccination certificates, to safely restart travel.

Disclaimer:

This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

For more information visit https://cc.com.mt/ The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.

Important(Notices)
The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Similarly any views or opinions expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the particular circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Calamatta Cuschieri & Co. Ltd. (CC) has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. CC does not accept liability for losses suffered by persons as a result of information, views or opinions appearing on this website.
This website is owned and operated by Calamatta Cuschieri & Co. Ltd (Co. Reg. No. C13729) of 5th Floor, Valletta Buildings, South Street, Valletta VLT 1103, Malta. CC is licensed to conduct Investment Services in Malta by the Malta Financial Services Authority.