More airlines could fail in coming months
More airlines are likely to fail in the coming months as carriers gradually ramp up operations while consumers remain hesitant to fly, an industry group warned.
On Tuesday, Aeromexico became the third Latin American airline to file for bankruptcy protection following a plunge in demand because of the coronavirus pandemic. Avianca Holdings of Colombia and Chile’s LATAM Airlines had earlier sought protection from creditors.
Global demand for air travel is only expected to return to 2019 levels in 2023, the International Air Transport Association said Wednesday. Montreal-based IATA represents about 290 carriers that together account for about 82 per cent of global air traffic.
“The economics are going to be very tough at the beginning of the recovery period,” IATA chief economist Brian Pearce said. “As airlines begin to fly again, begin to operate only a small portion of their fleet but take on all of the cost that entails and have to pay for the servicing of the debt they’ve accumulated, revenues are likely to be weak. There’s a substantial risk of more airlines failing in that environment.”
Governments from France to Italy, Singapore and the U.S. have announced more than $120 billion US combined in aid for airlines and aerospace companies since the start of the pandemic.
“We’ve seen in Latin America
that in the absence of substantial government aid, it’s very difficult for airlines to survive,” Pearce said. “The fact we haven’t seen substantial failures around the world is because governments have been providing substantial aid.”
Even massive job cuts may not be enough to save some airlines, according to IATA director general Alexandre de Juniac.
“There is a resizing of the industry following the drop in demand,” de Juniac said. “Unfortunately, it will probably continue. The shrinkage of the sector is not only the shrinkage of each airline, but also the reduction of the number of actors in our industry.”
Travel demand — as measured by revenue passengerkilometres — shrank 91 per cent in May from the same month a year ago. While that’s better than April’s 94 per cent drop, there are reasons to be cautious about the pace of improvement, Pearce said.
Not only does IATA expect business travel — a key driver of airline profitability — to lag during the first stage of the recovery, but many leisure passengers remain hesitant to board an airplane. Consumer confidence in markets such as Germany, the U.K. and the U.S. is still very low, Pearce said.
“We’ve really not seen consumer confidence pick up at all in some cases from the lows reached in April,” he said. “To see a significant pickup in leisure travel, we’re going to need to see more confidence amongst consumers and passengers.”
As for business-class demand, “corporates are going to be very cautious about travel in the future,” Pearce said.
Even with aircraft groundings and flight cancellations, passenger demand plummeted faster than capacity in May.
Load factors globally fell to an all-time low of about 51 per cent in May, down from about 82 per cent in the same month a year ago, IATA said. Planes in the U.S. are currently less than 40 per cent full, “which is unlikely to be profitable,” Pearce said.
Although about 20 per cent of countries are starting to ease travel restrictions, 65 per cent have kept their borders shut to international air travel, according to IATA.
“International border restrictions are only just starting to be relaxed,” Pearce said. “We really need the relaxation of those restrictions before we see a significant rebound in travel.”
In the meantime, capacity planning will be “especially challenging” for airlines, IATA said.
“There are indications that passengers have changed their booking behaviour amidst the COVID crisis, buying their tickets much closer to the date of departure than was the case previously,” the association said in a report published this week. “This change in the timing of ticket purchases has reduced airlines’ visibility on future demand in an already highly uncertain environment.”