IATA and OECD reveal the
bad news May/Jun 2020

In June IATA published its biannual update of the airline industry economic performance. The economics team usually does this to coincide with the trade group’s annual general meeting — but this year the AGM has been postponed to December in deference to the lack of airline connectivity in the coronavirus crisis (although it is still currently planned to be a physical rather than virtual meeting). The forecasts do not make for happy reading: IATA bluntly points out that 2020 will be the worst year in the history of the airline industry.

With most of the world’s fleet grounded for a large part of the second and third quarters, the group is forecasting total passenger traffic demand to be down by 55% year-on-year (with a 20 percentage point drop in load factors to 62.7%), and passenger revenues to fall by 60% to $241bn. Cargo demand continues, but without the aircraft to fly it (50% of freight is carried in the belly-holds of passenger aircraft) and IATA is forecasting freight demand will be down by 17% year on year while, with the squeeze on capacity, freight yields could grow by 30% and total freight revenues could rise by nearly 10%.

With so many unescapable fixed and semi-fixed costs, it expects operating expenses for the industry as a whole to fall by 35% and the industry to register full year operating losses of an astounding $-98bn (a negative margin of 23%) and net losses of $-84.3bn (equivalent to each departing passenger being paid $37.50).

The numbers are huge but also reflect the fact that this will be the first truly global crisis to affect the industry with airlines in each of the regions worldwide equally hammered: IATA expects net losses of $20-25bn each in North America and Europe, $29bn in Asia; negative operating margins of over 20% in North America, Europe, the Middle East and Latin America and nearer 30% negative margins in Asia and Africa.

The organisation is muted on optimism for recovery. It is forecasting a rebound in 2021 and a 50% jump in passenger traffic: but an expectation of 3.4bn total passenger numbers for that year would be 25% less than the peak in 2019 and even represent a shortfall from the 3.5bn carried in 2015. Its forecast for industry revenues of $598bn would still be 28% below the peak in 2019 (and 7% below that achieved in 2011). In profit terms IATA is suggesting that 2021 will see further operating losses of $-25.2bn and net losses of $-15.8bn.

In context, the $100bn of losses IATA is forecasting for the next two years equates with half the total net profits generated by the industry since the second world war (actually since 2005 as the industry had modestly lost a net $2bn in the previous 60 years); and as the IATA team points out in its report, the annual average $111bn in tax revenues generated by the industry and its customers; and an estimated $123bn (by mid-May) of government aid made available to the industry because of the Covid-19 crisis.

But the aid, while welcome and possibly allowing the industry to survive the crisis, is helping to add a significant debt burden (50% of the government aid comes in the form of debt and loan guarantees) which will delay recovery from the crisis. In an earlier study in May, IATA estimated that industry debt levels could rise by $120bn in 2020 to total $550bn. IATA’s Director General and CEO, Alexandre de Juniac, was quoted as saying: “Government aid is helping to keep the industry afloat. The next challenge will be preventing airlines from sinking under the burden of debt that the aid is creating. It changes the financial picture of the industry completely. Paying off the debt... will mean that the crisis will last a lot longer than the time it takes for passenger demand to recover”.

Also in June, the OECD released its Economic Outlook, containing an assessment of how Covid-19 will affect GDP, to which the aviation industry contributes, and by which it is driven.

Globally, there are two basic scenarios: single-hit epidemic in which economic activity gradually creeps up so that by the end of 2021 the world is just 10% below the end-2019 GDP level; a double-hit scenario whereby the virus returns in a second wave which depresses the recovery path so that GDP at the end of 2021 is over 20% below end-2019 levels. The OECD is unwilling to hazard a view beyond 2021, which is understandable given the record errors made by all forecasters when predicting 2020 GDP.

The regional analyses reveal some interesting differences.

• US GDP grew strongly since 2014 but the 2020 fall is precipitous, so the 2021 recovery only gets the country back to 2017 levels.
• In Europe, Germany appears better off than the other three major economies, with a shallower recession and a return to 2018 levels in 2021. (Lufthansa is another story — see over.)
• A relatively minor impact from Covid-19 in South Korea which gets all the plaudits for its handling of the crisis. But Japan’s long tern GDP growth has been so insipid that the crisis means that in 2021 Its GDP will be about the same as in 2014.
• A quick reversion to dynamic GDP growth is anticipated For China, the principal generator of aviation growth, as well as for India and Indonesia.
• By contrast, Covid-19 has just added to the longer term recession in Brazil, which in 2021 will be 7% below where it was in 2014 in GDP terms. With none of the South American economies performing well, it may not be a surprise that the first big casualty of the crisis has been LATAM.