Airlines will use up $77b of cash reserves to meet costs in 2Q 2020: IATA

Airlines will "burn through" $77 billion of their reserves in the last six months of this year, to pay off the higher expenses related to aircraft maintenance as well as meet wage commitments. They will not be helped by revenues that will remain weak during this period, according to IATA. They will also be impacted by the stopping of government programmes that had helped flight operators stay afloat during the first-half of 2020, the International Air Transport Association added.

Airlines collectively used $51 billion of their cash balances between April to end June. While they have been able to cut fuel costs, other expenses like "maintenance costs or labor costs are much more difficult to reduce and that is why airlines are still burning through cash - they're still making significant losses," said Brian Pearce, IATA's Chief Economist. "This led us to re-estimate what we thought was happening to cash burn in the second quarter of this year - we think the second quarter was probably going to be the worst for the industry (and) certainly the low point for air travel."

Passenger revenues will be down 75 per cent by the end of the year due to fares and yields being lower than last year, IATA said. While revenue declines can't be helped, the shift towards short-haul flights has made it hard for airlines to keep their costs in check. "Most of the travel taking place today is short-haul, which requires a lot more aircraft to serve the same passenger kilometers," the official added. "This also means it's difficult for airlines to cut their fleet costs proportionately to the fall in in revenues."

Worldwide, the only reason airlines made it this far was government support in the form of direct bailouts and wage subsidies. During the pandemic, airlines received $160 billion in aid from states and another $20 billion from suppliers. "That has been life support for the world's airlines; we've only seen 30 or 40 airlines either fail or go into bankruptcy restructuring," said Pearce. However, governments are getting ready to pull the plug on these arrangements. "If we look at the expected end dates for those wage subsidy programmes, a significant number are supposed to be coming to an end. That makes sense when we look at the broader economy that is recovering strongly, (but) the airline industry is certainly not strong enough."

Meanwhile, The repatriation rush out of the UAE is winding down… and this is showing up in ticket rates on all the major routes. Airlines will be hoping that this too will help convince passengers to return, if not now by at least midNovember and thereafter. One can book a flight to Mumbai at Dh400 next week, as against the Dh650 and over that was the average during August. Seats on Karachi and Lahore bound flights are at Dh800 by next week and a steep drop from Dh1,400 or so in August.

Tickets to the Philippines have nearly halved to Dh1,370 as more airlines shuttle between Dubai and Manila. As part of a promotion, Cebu Pacific briefly offered a basic fare of Dh300 as recently last month. However, demand to fly to the Philippines has been stifled by pandemic-related restrictions. Until recently, only Filipino nationals and foreign diplomats were allowed into the country. Returning from Philippines to UAE the requires passengers to get multiple approvals. While the Asian sectors are seeing the sharpest corrections on rates, on routes such as DubaiLondon, fare have either stabilized (at Dh2,000) or dropped marginally.

"The reluctance to fly is one thing - having to quarantine at your destination is another," said Saj Ahmad, Chief Analyst at StrategicAero Research. "People aren't prepared to take that risk - or run the risk of not getting their money back if they have to alter their travel plans. "Since many have lost their jobs, that same demand pool of would-be flyers simply don't exist any longer. Those who choose to fly do so out of necessity - not want."

But even if a sizeable number of those wanting to fly out of necessity show up at UAE airports, that's still a positive as far as airlines are concerned. Emirates keeps adding more routes on its return-to-normalcy push, while the UAE's newest airline, Air Arabia Abu Dhabi, will add a second destination to Bangladesh from October 11. The strategy is clear… get back into the air on those sectors most likely to feed into demand. It could be even better if some uniform requirements on safety protocols are followed by all governments, according to IATA (International Air Transport Association). The grouping has called for systematic testing of passengers before departure instead of the current quarantine at destination requirement. "This should enable governments to safely open borders without quarantine," said Alexandre de Juniac, IATA's CEO, during a conference call.

"It will provide passengers with the certainty that they can travel without having to worry about last minute change in government rules." If that doesn't change, expect more fare cuts… even during the end-of-year peak season. In short, airlines will put out a whatever-it-takes strategy. "Once there is demand, the traditional way airlines attract passengers is with rate cuts," said Andrew Charlton, an aviation analyst.

But for the longer term, there will be fewer airlines as many would collapse or consolidate, and the ones that survive will need smaller fleets, said Charlton. "There are a lot of costs [airlines will need] to recover - that inevitably means airfares will be under pressure to rise."

On some sectors they have risen - sharply. For carriers and travel agencies, flying expat workers from Kuwait, Bahrain, and Saudi Arabia to here has turned out to be a more lucrative proposition.