Credit: Southwest Airlines
IATA is concerned that its December 2020 forecast for traffic recovery may have been too optimistic and the airline industry will burn a lot more cash for longer than anticipated.
According to a new scenario released Feb. 24, IATA is now anticipating a combined industry cash-burn for 2021 of up to $95 billion, nearly doubling the $48 billion it predicted just two months ago. The worsened outlook could become reality if governments continue to tighten travel restrictions as they have over the past few weeks in their efforts to contain the spread of new coronavirus strains.
A less severe scenario sees a $75 billion cash burn for 2021, assuming travel restrictions are eased in developed countries once vulnerable groups are vaccinated. IATA estimated that airlines burned through more than $150 billion in cash in 2020.
The December 2020 base forecast assumed that air travel demand will return to 51% of 2019 levels for the full year of 2021. With more stringent restrictions in place, air traffic could be down to as low as 33% of pre-crisis volumes in 2021.
IATA director general and CEO Alexandre de Juniac said during a media briefing that the industry “will not withstand” the deteriorated situation without additional government support that could reach $80 billion for the first half of 2021. In 2020, the sector received around $200 billion of supports in various ways.
Chief economist Brian Pearce warned that the airline industry is now expected to continue to burn cash through the 2021 fourth quarter, which is when IATA previously believed the bleeding would stop. The deteriorated outlook raises “questions of survivability,” Pearce said.
Recently, bookings have weakened even in domestic markets that had recovered faster than the international business. For its forecast, IATA no longer expects significant border openings in time for the Easter holidays. A lot will depend on whether airlines can use the Northern summer to generate much needed cash. Forward bookings for travel in July and August are now 78% below what they were at the same time in 2019. While that is a reason for concern, typically only 7% of total capacity would have been sold even in normal times so early and recent trends have been for very late bookings.
De Juniac pointed to the UK as a “good example” of showing a roadmap for reopening. After the government revealed plans about how it plans to drop restrictions by the summer—and with the vaccination campaign progressing—the country’s airlines have witnessed an immediate and dramatic surge in bookings.
IATA also does not believe it needs to change its longer-term forecast that still anticipates a return to 2019 levels of flying by 2023 or 2024. Pearce pointed out that general economic forecasts are currently revised upwards and that consumers have large savings they want to spend. “There is a lot of pent-up demand,” Pearce said.
IATA does not expect airlines to become cash-positive before 2022
The International Air Transport Association (IATA) released new analysis showing that the airline industry is expected to remain cash negative throughout 2021. Previous analysis (November 2020) indicated that airlines would turn cash positive in the fourth quarter of 2021. At the industry level, airlines are now not expected to be cash positive until 2022.
Estimates for cash burn in 2021 have ballooned to the $75 billion to $95 billion range from a previously anticipated $48 billion. The following factors play into this estimate:
- Weak Start for 2021: It is already clear that the first half of 2021 will be worse than earlier anticipated. This is because governments have tightened travel restrictions in response to new COVID-19 variants. Forward bookings for summer (July-August) are currently 78% below levels in February 2019 (comparisons to 2020 are distorted owing to COVID-19 impacts).
- Optimistic Scenario: From this lower starting point for the year, an optimistic scenario would see travel restrictions gradually lifted once the vulnerable populations in developed economies have been vaccinated, but only in time to facilitate tepid demand over the peak summer travel season in the northern hemisphere. In this case 2021 demand would be 38% of 2019 levels. Airlines would burn through $75 billion of cash over the year. But cash burn of $7 billion in the fourth quarter would be significantly improved from an anticipated $33 billion cash burn in the first quarter.
- Pessimistic Scenario: This scenario would see airlines burn through $95 billion over the year. There would be an improving trend from a $33 billion cash burn in the first quarter reducing to $16 billion in the fourth quarter. The driver of this scenario would be governments retaining significant travel restrictions through the peak northern summer travel season. In this case, 2021 demand would only be 33% of 2019 levels.
“With governments having to tighten border restrictions, 2021 is shaping up to be a much tougher year than previously expected. Our best-case scenario sees airlines burning through $75 billion in cash this year. And it could be as bad as $95 billion. More emergency relief from governments will be needed. A functioning airline industry can eventually energize the economic recovery from COVID-19. But that won’t happen if there are massive failures before the crisis ends. If governments are unable to open their borders, we will need them to open their wallets with financial relief to keep airlines viable,” said Alexandre de Juniac, IATA’s Director General and CEO.
With airlines now expected to burn cash throughout 2021 it is vital that governments and the industry are fully prepared to restart the moment governments agree that it is safe to re-open borders. That makes three initiatives critical:
Planning
Preparing the industry to safely restart after a year or more of disruption will take careful planning and months of preparation. Governments can ensure that airlines are prepared to reconnect people and economies by working with industry to develop the benchmarks and plans that would enable an orderly and timely restart.
“The UK has set a good example. Earlier this week it laid out a structure for re-opening based on an improvement in the COVID-19 situation. This gives airlines a framework to plan the restart, even if it needs to be adjusted along the way. Other governments should take note as a best practice for working with industry,” said de Juniac.
Health Credentials
It is becoming clear that vaccines and testing will play a role as the pandemic comes under control and economies ramp up, including the travel sector. The IATA Travel Pass will enable travellers to securely control their health data and share it with relevant authorities. A growing list of airlines—including Air New Zealand, Copa Airlines, Etihad Airways, Emirates, Qatar Airways, Malaysia Airlines, RwandAir, and Singapore Airlines—have done or are committed to doing trials with IATA Travel Pass.
“Efficient digital management of health credentials is vital to restart. Manual processes will not be able to cope with volumes once the recovery begins. Digital solutions must be secure, work with existing systems, align with global standards and respect data privacy. In developing the IATA Travel Pass these are fully in focus. The IATA Travel App will help to set the bar very high for managing health credentials, protecting against fraud and enabling a convenient travel process. While there is a choice in the market for solutions, there should be no compromise on the fundamentals, or we risk failing systems, disappointed governments and travellers, and a delayed restart,” said de Juniac.
Global Standards: As vaccination programs and testing capacity expand, two developments have become critical—global standards to record tests and vaccines; and a plan to retrospectively record those who have already been vaccinated.
“Speed is critical. Fraudulent COVID-19 test results are already proving to be an issue. And as vaccine programs ramp up governments are using paper processes and different digital standards to record who has been vaccinated. These are not the conditions needed to support a successful restart at scale when governments open borders. The WHO, ICAO, and OECD are working on standards, but each day without them means the challenge gets bigger. We need an early conclusion by competent authorities that the industry can plan around,” said de Juniac.
“Even as governments focus on managing the COVID-19 crisis, we must be thinking a step ahead to the plans, tools and standards needed to restart flying and energize the economic recovery from COVID-19. Working in partnership is nothing new for airlines or for governments. It’s how we have delivered safe, efficient, and reliable connectivity for decades. For a year it’s been lockdowns and restrictions as vaccines were developed and testing capacity expanded. The reason for all the pain that this has caused is to keep people safe and to eventually be able to restore their well-being and that of the economy. With good news on vaccines and growing testing capacity, there is a glimmer of light at the end of the tunnel. So, it’s the time to ask governments for their restart plan and to offer any support from industry that could help,” said de Juniac.
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