Thanks to the recovery of air travel, the airline industry will likely be able to reduce its losses this year to $9.7 billion. This is an improvement over the previous forecast of a $-11.6 billion loss from October and includes the effects of inflation, the International Air Transport Association (IATA) said on June 20 in its latest update. IATA predicts further reduction of airline losses to 9.7 billion.
The expected loss comes on the back of the colossal $137.7 billion loss in 2020, the first year of Covid, and $42.1 billion in 2021 and reflects the recovery of air travel since then. North America could even generate an $8.8 billion profit already this year, but an industry-wide profit is not predicted until 2023. The recent trend has seen domestic recovery plateauing while international revenues per kilometer (RPK) have accelerated.
Director-General Willie Walsh said in the press conference in Doha during the IATA Annual General Meeting that the guidance for 2022 includes the effects of high oil prices and inflation. Oil and jet fuel prices have soared since the start of the war in Ukraine in February and are up now by forty percent. The ‘crack’ between oil and fuel prices has even widened to 24 percent compared to the usual 20 percent, or even 10 percent back in 2021. It is related to refinery capacity.
At $192 billion, fuel prices will account for 24 percent of the airlines’ total costs this year compared to 19 percent in 2021. This is based on a $101.2 per barrel for Brent oil and $125.5 for kerosene, but prices have been even higher. IATA economist Marie Owens Thomsen said that oil prices are expected to drop during the year and plateau in 2023, but this prediction is partly based on air travel in China not recovering until early next year. “But if we are wrong, that paints a totally different picture”, she added.
Inflation will be on average nine percent this year, with core inflation of six percent. This will have a dampening effect on air travel as customers prefer not to spend money on flying, although many people are keen to fly again and are willing to deplete their savings. Inflation is also local and the lowest in countries like Mexico and Vietnam which had the most travel restrictions. IATA expects inflation will wane in 2023.
Yet, with uncertainties of inflation and fuel prices, economic growth as GDP is forecasted at 3.4 percent compared to 5.8 percent in the October forecast. Rising interest rates will also likely have an effect on airline debts, which total $650 billion. But Owens Thomsen said that central banks will be careful not to raise rates too high or risk “engineering a crisis in their economies. That’s why we think nominal rates will remain below inflation for years to come.”
While IATA is worried about the staff shortages at airports and airlines, Walsh said that the problem is seen only in a few regions and, as such, can be classified as an issue of limited proportions. IATA expects that jobs directly related to the industry will be up 4.3 percent over last year to 2.7 million, which is still down on the 2.93 million in 2019. One of the questions is where all employees have gone that have left the industry during the pandemic and if they will come back.
Emirates CEO Sir Tim Clark said he is worried, while his Qatar Airways colleague Akbar Al Baker blamed staff shortages in some regions on the fact that many have got used to working at home and aren’t prepared to go back to work elsewhere. Walsh noted that airports that suffer the most in Europe happen to be the ones that raised their fares to airlines the most, like London Heathrow, Amsterdam Schiphol, and Dublin. More on the impact of staff shortages in a story later this week.
While the impact of the war in Ukraine seems limited, the effects of sanctions on Russia are tougher. Seven percent of routes through Russia are now closed to international traffic, resulting in “significantly higher costs.” In cargo, the market has lost the capacity that was offered by the Russian and Ukrainian heavy-freight companies, which resounds in other regions as well. This is reflected in the flattening of of cargo growth
IATA sees strong demand for air travel. If the world should be confronted again with new Covid variants, the association urges governments not to revert back to the closing of borders scenario but follow the guidelines of the World Health Organization (WHO) and keep borders open. Closing borders only delayed the spreading of variants by a maximum of four days, something he already mentioned in December. “The costs of government mismanagement were colossal”, said Walsh.
“Border closures create economic pain but deliver little in terms of controlling the spread of the virus. With high levels of population immunity, advanced treatment methods, and surveillance procedures, the risks of Covid can be managed. At present, there are no circumstances where the human and economic costs of further Covid-19 border closures could be justified,” said Walsh.
Even if the recovery continues at a steady pace, the effects of two years lost to the pandemic will be felt for many years. “If our current forecast is realized, traffic will still be six percent down on pre-pandemic levels in 2040”, said Owens Thomsen.
Active as a journalist since 1987, with a background in newspapers, magazines, and a regional news station, Richard has been covering commercial aviation on a freelance basis since late 2016.
Richard is contributing to AirInsight since December 2018. He also writes for Airliner World, Aviation News, Piloot & Vliegtuig, and Luchtvaartnieuws Magazine. Twitter: @rschuur_aero.