• Wed. Sep 21st, 2022

Johan Lundgren wasted no time drafting a letter of complaint when a UK government minister recently warned it was too early to even think about booking a summer break.

The exasperation of Lundgren, the chief executive of easyJet, Europe’s second-largest low-cost airline, is understandable because the stakes are so high for an airline industry whose hopes for a vaccine-led recovery this year are dim. already in danger.

The pandemic abruptly shut down the skies last spring, bludgeoning the industry as it suffered the biggest drop in flights since World War II. Less than two months into this year, the danger facing airlines is more of a slow throttle as country-by-country travel restrictions are tightened and, in some cases, borders closed to prevent the spread of new variants of Covid-19.

For an $800 billion industry built on moving people, this is an alarming picture. Europe and the United States have tightened travel restrictions; the UK introduced stricter quarantine rules on Monday while Australia’s borders are set to remain closed until the end of the year.

“Ever-changing travel restrictions like quarantines are the biggest hurdle to customer bookings,” Lundgren told the FT.

Andrew Charlton, an aviation consultant, puts it bluntly: “Countries that have been really good at suppressing the virus have done so by killing international aviation.”

New Zealand is among the countries to have adopted such an approach – its flagship airline carried just 6,000 long-haul passengers in December.

Even as vaccines continue to offer a long-term solution to Covid-19 — and most carriers still believe this year will ultimately be better than last — the signs of renewed pressures are growing.

The number of flights in European airspace has plunged this month to the lowest level since the first strict lockdowns imposed last spring. Despite a domestic air market buoyed by an economic recovery, China’s recovery has faltered as Beijing discouraged travel over the Lunar New Year.

Carriers have scaled back their already meager ambitions for the first quarter, with easyJet and rival Ryanair expecting to fly just 10% of their normal schedules.

In a sign of how the pandemic is confusing industry expectations again, the International Air Transport Association, which represents airlines around the world, has admitted there is a growing risk that passenger numbers for this year is lower than its projections.

“We had based our predictions on the ability and willingness of governments to start easing travel restrictions once the vulnerable part of the population has been vaccinated,” said Brian Pearce, Iata’s chief economist. “I think what we’ve seen in recent weeks is that governments are taking a much, much tougher and more cautious approach.”

With the outlook for carriers seeming to get tougher by the day, the ramifications run far deeper than the tearing of passenger forecasts.

Travel bookings have plummeted since the start of the year, with airlines forecast to lose $38 billion in 2021 according to global industry body Iata © Jeremy Suyker/Bloomberg

Texas-based American Airlines warned this month that 13,000 of its employees risked losing their jobs, blaming new restrictions on international travel and slow vaccine distribution.

“We were confident that we would consider a summer schedule where we would fly all of our planes and need the full strength of our team,” general manager Doug Parker said in a memo to staff. “Unfortunately, that is no longer the case.”

The American Airlines chief’s measured language shields pain bearers from the fact that their expectations have repeatedly been disappointed during the pandemic.

Tony Douglas, chief executive of Gulf carrier Etihad, said he was hoping for a rebound in passenger numbers by the second half of the year, but “almost every time we review what’s going on it changes”.

For European airlines in particular, the prospect of mass vaccinations triggering a surge in summer bookings was seen as key to repairing their balance sheets. “Summer is crucial, it’s really critical” for European carriers, said Geoffrey Weston, partner at consultancy Bain.

The region’s five biggest carriers – Ryanair, British Airways owner IAG, Lufthansa, Wizz Air and easyJet – have already raised around $20 billion from a mix of governments, shareholders and bond markets for the help weather the crisis.

Bernstein analysts believe that in a worst-case scenario with few flights over the summer, only Wizz is likely to avoid having to raise more money.

Line chart of year-over-year percentage change in passenger-kilometre revenue showing domestic flights recovered faster than international flights

While the slow rollout of jabs in some countries has dampened the chances of a firm rebound in international travel, airlines’ new enemy this year is of greater concern: the spread of new variants of Covid-19 that may be more resistant to the current stable of vaccines.

A small trial which found the Oxford/AstraZeneca vaccine may be less effective in stopping milder and moderate cases of the South African variant has only added pressure on the UK government to introduce restrictions on travel stricter this week.

It also complicates any attempt to achieve international coordination of travel rules between governments, which airline executives have long believed necessary for a resumption of air travel at any scale.

Line chart from MSCI World Airlines showing airline stocks have recouped some of their losses since the introduction of vaccines in November

Sweden and Denmark have said they will offer digital coronavirus passports by summer to help create international standards around certifying people fit to travel. Beyond that, airlines were largely left to develop their own solutions, working together to develop digital health passports that would provide certification of negative viral tests and vaccinations.

But Wizz Air chief executive József Váradi acknowledges that “at this point, as an industry, we don’t own our own destiny, we focus on political decisions”.

While governments are increasingly focused on protecting their borders against new variants, shareholders have not given up on a rebound in passenger numbers this year. Airline stocks have largely preserved the gains they have made since November, when many of the major vaccine developers revealed their shots were effective.

And like other airline chiefs, easyJet’s Lundgren hasn’t given up hope.

“We have organized ourselves so that we can make decisions as late as possible” on the number of planes to fly over Easter and the start of summer, he said.

When the recovery does come, low-cost carriers may be best placed to capitalize as their short-haul business rebounds faster than the long-haul that traditional European groups such as the owner of British Airways rely on. , IAG and Air France-KLM.

In the United States, the major carriers are all forecasting a slower recovery in long-haul international travel than domestic. Its vast internal market at least offers operators a cushion that European long-haul specialists do not have.

For an industry whose lifeblood is open borders, 2021 has already served as a reminder that any restoration of that is still a long way off.

“There’s no one inside who can smile and think ‘I’m in a better position than the competitors’,” said Douglas of Etihad. “In reality, everyone is exposed.”