Airlines face fierce headwinds

14-Aug-2020 Intellasia | BangkokPost | 6:02 AM Print This Post

The global airline industry has been disproportionately affected by the coronavirus pandemic, and the strain on its once flourishing fundamentals will affect a broad swath of the world economy well into 2022 and beyond, Moody’s Investors Service says in a new report.

The industry is one of just a few that saw demand drop by more than 90 percent within weeks of the onset of the crisis.

While air travel itself is a key facilitator of tourism spending, the outsourcing by airlines of many services, along with significant employment and fuel consumption in normal economic times, similarly supports economic activity across many sectors.

“Passenger demand for air travel drives demand for key stakeholders in the aviation industry, including airport operators, aircraft leasing companies and aircraft manufacturers, as well as a multitude of service providers that keep airlines and airports running,” said Jonathan Root, a senior vice-president of Moody’s.

“We expect each of these stakeholders will be significantly impacted for at least the next three years, with 2020 declines for their products and services anticipated to be in the 40 percent to 50 percent range, if not higher.”

As passenger traffic eventually improves, airports will recover first along with airlines, followed by aircraft lessors and then aircraft manufacturers. The broad base of global suppliers that feed the aircraft manufacturers will be the last to regain their footing, but not before 2023, according to Moody’s.

FOUR-YEAR JOURNEY

In terms of demand recovery, Moody’s models anticipate a recovery in passenger demand close to 2019 levels by the end of 2023, once the concerns related to personal health and safety are relieved.

However, it cautions that passenger demand may ultimately align with a slower recovery case, or worse, if governments enforce social distancing and reinstate quarantine protocols in light of recent increases in infection rates.

Passenger airlines supported about 3 percent of world GDP in 2019, according to the International Air Transport Association (IATA). Airline cargo operations materially bolster international trade, with movement of more than $5 trillion of goods in 2019.

Moody’s expects the fundamental performance of airports will move hand-in-hand with demand for air travel because every journey starts and ends at an airport. Thus airports should recover largely in step with the airlines.

As passenger demand recovers, airlines will return aircraft to service, restarting the market for leasing and trading aircraft, which currently remains in hibernation. Aircraft lessors will benefit as recurring requests for rent deferrals subside.

At the same time, there will be a greater willingness to repossess aircraft from weaker airlines as gradually recovering demand facilitates placement of aircraft on new leases.

Aircraft manufacturers, including Airbus and Boeingand the broader global supply chain feeding into their operationswill be the last of the direct aviation industry stakeholders to regain their 2019 footing, and this will not occur before 2023.

Across the globe, many carriers including easyJet, Cathay Pacific, Emirates, Garuda Indonesia and Singapore Airlines, to name a few, have parked 90 percent or more of their fleets. Moody’s expects a non-uniform return of aircraft to service, with airlines that fly mainly domestic or intra-continental service (notably Europe and Asia) bringing aircraft back sooner than legacy carriers with long-haul international operations.

Government supportwhether via grants, loans and/or equity investmentswill remain a key differentiator in airlines’ ability to avoid financial restructuring or liquidation. Lack of adequate government support has been a key contributor in recent airline insolvencies in different regions.

With an effective coronavirus vaccine likely not available before well into 2021and likely longer to cover potential mutations of the virus and to ensure adequate dosage supplyadditional government support will be required for the airline industry if employment levels are to be maintained near already reduced levels, and potentially to stave off additional airline restructurings and insolvency proceedings.

EFFICIENT JETS NEEDED

The sooner demand recovers, the better the recovery prospects for aircraft lessors and manufacturers, particularly because of the retirements of older, less efficient aircraft that will occur because of the coronavirus.

Seat density and network planning will affect the total demand for aircraft in respective airline fleets as new models with higher seat counts replace smaller, older aircraft, and airlines more efficiently utilise aircraft assets. Some will change their networks, with stronger carriers expanding, and others retrenching somewhat.

Potential changes to long-haul flying are also on the table. Some carriers may expand point-to-point operations, while others may revert to concentrating on hub-to-hub flying, relying on code-share or joint-venture partners to complete a passenger’s long-haul journey.

To replace retired aircraft and to minimise costs related to carbon emissions, the former would require mid-size wide-bodies like the Boeing 787 or Airbus A350-900, and the latter would promote demand for the Boeing 777-9 or the Airbus A350-1000both the largest available passenger models in each manufacturer’s lineup.

The need to reduce carbon emissions will also hold out hope for deliveries of A320neo and 737 Max narrow-bodies, including if regulators make carbon reduction schemes more demanding, as some European governments have already done as a condition for their financial support.

https://www.bangkokpost.com/business/1967455/airlines-face-fierce-headwinds

 


Category: Thailand

Print This Post