• Wed. Oct 5th, 2022

Global airline industry forecast improves as passenger numbers soar

ByKimberly A. Brochu

Sep 1, 2022

By alexander jonesinternational banker

IAt the end of July, Air France-KLM published its second quarter results, showing that the French-Dutch airline had returned to profits for the first time since 2019 and had largely exceeded analysts’ estimates. The results are just part of a robust recovery demonstrated by the global airline industry as it seeks to return to pre-pandemic health levels.

As COVID restrictions continue to ease across most of the world and tourism activity picks up, assessments of the outlook for the global airline industry over the coming months are becoming more optimistic. Indeed, after a few difficult years, profitability could return above zero as early as next year, while revenues continue to increase. “Air France-KLM continues to impress,” Bernstein analyst Alex Irving recently told customers, adding that the airline appears to “have pulled off a surprising transformation” as demand soared in the second quarter in a context of a summer travel boom.

Indeed, Air France-KLM’s announcement, which showed second-quarter core and net profits of 386 million euros and 324 million euros, respectively, followed similarly positive news from Lufthansa. The German national carrier also announced on July 15 that profitability had returned in the second quarter and that revenues had more than doubled compared to the previous year, or 8.5 billion euros against 3.2 billion euros. for the same period last year. “The group benefited from a continued strong performance at Lufthansa Cargo,” the airline said.

These encouraging figures are now prompting industry analysts to upgrade their outlook for airlines over the next few years. According to the latest figures from the International Air Transport Association (IATA) trade group released on June 20, airline industry revenues will reach $782 billion this year, which, if achieved, would be 54.5% higher than last year and 93.3% of the revenue recorded in 2019 before the outbreak of the pandemic. Operational flights, meanwhile, are expected to total 33.8 million this year, which would be 86.9% of 2019 levels.

This latest forecast also pegs industry losses at $9.7 billion, an improvement over IATA’s previous projection in October 2021 of a loss of $11.6 billion and a major improvement over Compared to losses of $137.7 billion the industry incurred in 2020 and $42.1 billion in 2021, profitability is expected to return in 2023, with North America leading the way with an estimated profit of $8.8 billion in 2022. IATA also said it expects passenger revenue to account for $498 billion of industry revenue, more than double the $239 billion generated in 2021, while the number of scheduled passengers is expected to reach 3.8 billion. Cargo revenue, meanwhile, is expected to account for $191 billion in industry revenue, which would be slightly lower than last year’s $204 billion, but nearly double the $100 billion generated in 2019. But this year, the industry is on track to hit an all-time high. of more than 68 million tons of goods.

“Airlines are resilient. More and more people are stealing. And cargo is doing well amid growing economic uncertainty,” said IATA Director General Willie Walsh. “Losses will be reduced to $9.7 billion this year, and profitability is on the horizon for 2023. This is a time for optimism, although challenges remain on costs, particularly fuel , and some continued restrictions in a few key markets.” Walsh noted that in defiance of bleak predictions of wholesale bankruptcies and meltdowns, the industry is emerging “leaner, tougher and nimble,” aided by the accumulation of a long streak of profits heading into the pandemic. That said, he also acknowledged that repairing balance sheets carrying $650 billion in debt remains a “monumental” challenge.

“The reduction in losses is the result of hard work to control costs as the industry grows. The improvement in the financial outlook comes from the increase in holding costs by 44%, while revenues increased by 55%,” Walsh added. “As the industry returns to more normal production levels and with high fuel costs likely to remain for some time, profitability will depend on continued cost control. And that encompasses the value chain. Our suppliers , including airports and air navigation service providers, must be as focused on controlling costs as their customers to support the industry’s recovery.

In the long term, moreover, the prospects remain resolutely in good shape. IATA expects global passenger travel to return to 2019 activity levels in 2024 and grow significantly over the next two decades. “Between 2019 and 2040, we expect air passenger numbers to grow at an average annual rate of 3.3%, reaching 7.8 billion passenger trips per year by the end of our forecast horizon,” the report predicted. of June. “Notwithstanding the relatively slow pace of recovery to date, we expect Asia/Pacific to be the fastest growing region over the next two decades. Driven by favorable income growth and demographics, Asia/Pacific is expected to add approximately 2.5 billion additional passenger trips per year by 2040, at an average annual rate of 4.5%.

That said, relevant downside risks continue to threaten the ongoing recovery of the global airline industry in the immediate future. IATA highlights four of the most persistent risks:

  • War in Ukraine: The conflict will be particularly damaging if it escalates beyond Ukraine’s borders. Rising fuel prices – which already account for a significant share of airline costs at currently high levels – and falling demand due to declining consumer sentiment would particularly weigh on the growth trajectory of the transportation industry. air.
  • Global Economic Deterioration: Rising global interest rates will do much to calm consumer confidence. And if high inflation persists, it will reduce the purchasing power of consumers. IATA also noted that the recent strength of the US dollar would also have a negative impact by increasing the local currency prices of USD-denominated debt and making USD-denominated fuel imports more expensive for airlines.
  • COVID-19[FEMININE:[FEMININE: Although demand for travel is increasing, governments have ignored advice from the World Health Organization (WHO) that closing borders is not an effective way to control the spread of the virus. “The outlook assumes that strong and growing population immunity to COVID-19 means there will be no repeat of these policy mistakes,” IATA observed. “There is, however, a downside risk if governments revert to knee-jerk border-closing responses to future outbreaks.”
  • China: In 2019, the Chinese domestic market alone accounted for 10% of global traffic. If China continues to stray from its COVID zero tolerance policy, it should be a boon for the global airline industry. Prolonged implementation of the policy, however, “will continue to depress the world’s second largest domestic market and wreak havoc on global supply chains,” IATA warned.

Nevertheless, the forecast until at least the end of 2023 remains firmly on the upside. “Travel will rebound strongly in 2022,” ING said at the end of April. “Consumers are eager to travel and continental short-haul traffic will benefit from pent-up demand for leisure. The airspace shutdown is another blow to aviation, and Covid is a headwind for China, meaning a return to profitability could be pushed back, although the recovery is set to continue.

It should also be noted that the airline industry will not simply return to the same business models that prevailed before the pandemic. On the contrary, the last few years have marked the beginning of dramatic changes for airlines as they continue to adapt to a “new normal” in air travel. Indeed, ING also noted that airline networks could emerge smaller than expected and volumes could be more volatile. Additionally, with a likely reduction in business passenger numbers, there may well be increased demand for smaller, more flexible and easier to fill single-aisle aircraft.

And with technology now playing a more crucial role on the ground in our daily lives since the start of the pandemic, it will also play a central role in the skies as airlines continue to negotiate changing tourism trends. Artificial Intelligence (AI), for example, is among the technologies used to transform many of the industry’s most important operations toward automation. According to Data Bridge Market Research’s recent “Global Artificial Intelligence in Aviation Market” report, aviation ground operations, such as air traffic control and real-time assistance systems, will be notable beneficiaries of solutions that will help improve predictive maintenance and air traffic. control operations.

“Artificial intelligence in aviation includes the integration of services and systems such as automated baggage check-in, facial recognition, customer service, and aircraft fuel optimization, among others,” the report notes. . “With regard to artificial intelligence in the aviation industry, these functions are used to reduce the labor intensity of employees and ensure the efficient and smooth operation of particular procedures. Some aspects of the aviation industry have been automated, enabling more efficient management of general systems and improved customer satisfaction.