• ITVI.USA
    17,113.070
    186.890
    1.1%
  • OTRI.USA
    28.200
    0.000
    0%
  • OTVI.USA
    17,079.400
    184.170
    1.1%
  • TLT.USA
    3.090
    0.190
    6.6%
  • TSTOPVRPM.ATLPHL
    2.630
    0.060
    2.3%
  • TSTOPVRPM.CHIATL
    3.080
    -0.090
    -2.8%
  • TSTOPVRPM.DALLAX
    1.180
    -0.060
    -4.8%
  • TSTOPVRPM.LAXDAL
    3.210
    -0.070
    -2.1%
  • TSTOPVRPM.PHLCHI
    1.630
    -0.090
    -5.2%
  • TSTOPVRPM.LAXSEA
    3.360
    0.070
    2.1%
  • WAIT.USA
    121.000
    1.000
    0.8%
  • ITVI.USA
    17,113.070
    186.890
    1.1%
  • OTRI.USA
    28.200
    0.000
    0%
  • OTVI.USA
    17,079.400
    184.170
    1.1%
  • TLT.USA
    3.090
    0.190
    6.6%
  • TSTOPVRPM.ATLPHL
    2.630
    0.060
    2.3%
  • TSTOPVRPM.CHIATL
    3.080
    -0.090
    -2.8%
  • TSTOPVRPM.DALLAX
    1.180
    -0.060
    -4.8%
  • TSTOPVRPM.LAXDAL
    3.210
    -0.070
    -2.1%
  • TSTOPVRPM.PHLCHI
    1.630
    -0.090
    -5.2%
  • TSTOPVRPM.LAXSEA
    3.360
    0.070
    2.1%
  • WAIT.USA
    121.000
    1.000
    0.8%
Air CargoAmerican ShipperEconomicsNews

Fixed costs to sink airlines unless governments intervene, IATA warns

Trade body says fleets only 21% smaller than pre-pandemic because of focus on short-haul routes

The International Air Transport Association on Tuesday pleaded for more government aid to stave off bankruptcies and mass layoffs because fixed expenses far exceed paltry revenue streams and are quickly draining cash reserves. 

IATA downgraded its revenue outlook for next year because of the slow recovery from the coronavirus pandemic. Governments are closing borders and implementing other travel restrictions as infections surge at a record pace in Europe and the U.S. The industry association forecast 2021 airline revenues will be 46% lower than the $838 billion achieved in 2019 compared to a 29% contraction in its previous analysis.

The group estimates full-year 2020 traffic will be two-thirds less than last year, with December demand down 68%. Airlines say it will be even more difficult to stabilize their finances during the winter season, when business traditionally slows from the summer.

Earlier this month, IATA said member carriers will burn through $77 billion in cash during the second half of 2020, almost $13 billion per month, despite the phased restart of many flight schedules. The slow recovery in air travel means the airline industry will continue to burn cash at an average rate of $5 billion to $6 billion per month in 2021, or $60 billion to $70 billion for the full year.

The median airline has 8.5 months of cash on hand at the current burn rate, according to IATA.

“There is little good news on the cost front in 2021. Even if we maximize our cost cutting, we still won’t have a financially sustainable industry in 2021,” Director General Alexandre de Juniac said.

“The handwriting is on the wall. For each day that the crisis continues, the potential for job losses and economic devastation grows. Unless governments act fast, some 1.3 million airline jobs are at risk. And that would have a domino effect, putting 3.5 million additional jobs in the aviation sector in jeopardy along with a total of 46 million people in the broader economy whose jobs are supported by aviation,” de Juniac said. He repeated calls for pre-flight COVID-19 testing as an alternative to restrictions and post-travel quarantines that discourage people from flying.

Governments so far have provided $162 billion in support through direct grants, loans, wage subsidies, corporate tax relief, fuel tax abatements and other temporary tax holidays, according to IATA. U.S. airlines have released about 50,000 workers this month after a six-month wage subsidy for the industry expired Sept. 30, with Congress deadlocked over a broader economic stimulus package.

Airlines are helping themselves by slashing discretionary and capital expenditures to the bone, grounding aircraft, eliminating thousands of jobs, and encouraging large chunks of their workforces to take unpaid, indefinite leave.

Despite cutting costs by more than 50% during the second quarter, the airline industry blew through $51 billion in cash as revenues fell almost 80% compared to the same period last year. The industry is projected to lose up to $70 billion in 2021 and not turn cash-positive until 2022, according to IATA.

But about half of airlines’ costs are fixed or semi-fixed. IATA said the year-over-year decline in operating costs for the second quarter was 48% compared with a 73% decline in operating revenues, based on a sample of 76 airlines.

Meanwhile, as airlines reduced capacity in response to the collapse in travel demand, unit costs have increased because there are fewer paying seats to spread costs over. Preliminary third-quarter results show that unit costs increased about 40% compared to the same period in 2019. A major reason is that airlines are unable to downsize fleets in proportion to demand.

Airlines are mostly flying smaller jets on short-haul routes where pockets of demand exist. The sharp fall in the average distance flown means more aircraft are required to operate the network. Flown capacity, as measured in available seat kilometers, is down 62%, but the in-service fleet is only 21% less than before the pandemic — which is worse than the 23% reduction in aircraft reported in early October. 

Leases are also difficult to reduce. About 60% of the global commercial fleet is leased, but rental costs have dropped less than 10% this year despite some reductions from lessors, IATA said.

The trade body estimates that for airlines to break even, unit costs will need to fall by 30% in 2021 compared to this year’s average, but added that such a decline is unprecedented.

American Airlines last week reported a $2.4 billion net loss for the third quarter and said it expects to cut its cash outflow in half this quarter from $58 million per day earlier this year. United Airlines had a net loss of $1.8 billion, with daily cash burn at $25 million per day from $40 million in the second quarter.

IATA said fuel is a rare bright spot: Prices are down 42% versus 2019, but they are expected to rise next year as the economic recovery increases energy demand. The other area of optimism is cargo revenue, which has increased this year despite a one-third reduction in overall cargo capacity and the recessionary environment. 

Airports in distress

In related news, the Airport Council International (ACI) warned that 193 airports in Europe face insolvency in the coming months if passenger traffic doesn’t start to recover by year’s end. Passenger traffic is only about a quarter of what it was a year ago, and airports have lost 1.3 billion passengers so far in 2020. The group, too, urged governments to step up with aid and prevent the collapse of a large part of the air transport system. While governments have propped up some airlines, airports have yet to see much public aid.

The situation is expected to get worse as many European airlines sharply reduce capacity for the remainder of the year and early 2021 in the face of more border closures. 

Most airports in severe distress are regional, but ACI said larger airports also face risk despite drastic cost cuts and heavy borrowing.

IATA said airports and air navigation service providers should avoid cost increases to fill budget gaps, noting that infrastructure costs have fallen sharply because of fewer flights and passengers. 

Click here for more American Shipper/FreightWaves stories by Eric Kulisch.

RELATED NEWS:

American Airlines gets Q3 boost from cargo as yields pop

50% jump in cargo revenue helps United Airlines slow Q3 cash burn

IATA outlook for airline industry recovery slides to 2024

Airlines seek government help to survive winter doldrums

Cargo revenues buoy airlines amid $84b loss for 2020

Tags

Eric Kulisch, Air Cargo Editor

Eric is the Air Cargo Market Editor at FreightWaves. An award-winning business journalist with extensive experience covering the logistics sector, Eric spent nearly two years as the Washington, D.C., correspondent for Automotive News, where he focused on regulatory and policy issues surrounding autonomous vehicles, mobility, fuel economy and safety. He has won two regional Gold Medals from the American Society of Business Publication Editors for government coverage and news analysis, and was voted best for feature writing and commentary in the Trade/Newsletter category by the D.C. Chapter of the Society of Professional Journalists. As associate editor at American Shipper Magazine for more than a decade, he wrote about trade, freight transportation and supply chains. Eric is based in Portland, Oregon. He can be reached for comments and tips at ekulisch@freightwaves.com

Leave a Reply

Your email address will not be published. Required fields are marked *

Close