As U.S. airlines this week begin reporting unprecedentedly awful financial results for 2020, some investors are expecting that this particularly ugly page in the industry’s history soon will be turned and that the losses will end by the second half of this year.
However, most of the latest data, anecdotal evidence and trend analysis suggest that such thinking is wishful.
Yes, Ed Bastian, CEO of Delta Air Lines,
Beginning Thursday, when Delta will be the first to report its 2020 fourth quarter and full-year totals, U.S. airlines are expected to announce somewhere around $35 billion in losses. Globally the industry’s 2020 losses are expected to be at least $118.5 billion. Both numbers will far surpass previous records. But the losses won’t end there. The International Air Transportation Association, the global industry’s trade group, now says carriers worldwide this year will combine to lose around $38.7 billion, which would be the second worst year ever after 2020. U.S. carriers’ share of that 2021 loss easily could top $10 billion.
And, though Bastian may have been spreading sunshine rather liberally with his Jan. 1 note to Delta employees, he himself admitted that “we don’t yet know what travel demand is going to look like when it rebounds. We will be building a new Delta centered on a medical and economic recovery that hasn’t yet taken shape.”
Accordingly, analysts aren’t reaching for their sunglasses. Sunny days for the airline industry aren’t in any of their forecasts.
Cowen & Co. airline analyst Helane Becker said in a note to investors that Bastian’s comments were “aggressive” in light of very weak bookings for travel through the first few months of this year and the disappointing travel demand trend in November and December.
Until November, U.S. travel demand had increased each month since May, giving rise to hopes that the slow, steady trend would continue. But in November, demand didn’t budge from October, when IATA reported that the number of passenger miles traveled were down 70.6% from October 2019. November passenger miles flown were down 70.3% from November 2019, with that slight three-tenths of a point difference from October being little more than a rounding error.
December passenger traffic totals have not been reported yet by IATA but we know that demand during the first half of that month was so weak that carriers, which had scheduled an already significantly reduced number of flights across the first half of the month, cancelled hundreds more with little notice. Further, while there was a distinct increase in demand, as usual, during the holiday travel period across the second half of December, early indications are that that holiday rush, such as it was, wasn’t enough to push the industry’s demand curve back into significantly positive territory for the full month.
Worse, while holiday travel is nearly 100% leisure-motivated as people take vacations and visit family members, the sudden standstill or decline in business travel growth seen in November continued into December. That sent a deep shudder through the industry because business travelers typically pay substantially higher fares and are necessary in large numbers for conventional airlines to have any hope of profits.
“Delta is the airline most exposed to corporate travel,” Becker wrote in her report last week, casting doubt on the reasons for Bastian’s more positive comments. But “corporate travel remains down 85%,” she added, noting that the only business travel airlines did see appears to have come from small and mid-size businesses. Travel bought by big corporations for their many road warriors is, in normal times, the single biggest source of U.S. airlines’ revenue and profits.
“It is becoming increasingly clear that business travel will not be a meaningful contributor to revenue in 2021 as vaccination timelines continue to shift,” Becker said, referring to the slower-than-expected delivery of vaccinations to Americans, and the numbers of people refusing to take vaccinations remains surprisingly high.
Analysts at Bank of America last week also released results of a survey of business travelers from which they concluded that business travel will remain down 15% from pre-Covid levels even after the threat of Covid has vanished at some still-uncertain point in the future.
Indeed, today Peter Harbison, founder and chairman emeritus of the global aviation consultancy The Centre for Asia-Pacific Aviation said during a global video conference that not only will vaccines not spawn the quick recovery of business and international travel that many in the industry are hoping it will, but that “vaccines are a sideshow” in terms of their impact on industry revenues globally in 2021.
Harbison argues that “The roll-out of vaccines will take many months, and we have already seen significant delays and clear indications of difficulties in the supply chain. Vaccination priority is going to be given to categories (of people) who actually have, in most cases, lower travel propensity. The younger, healthier people will not receive vaccinations (until) later in 2021 – that’s if they receive them at all in 2021.
“Then there’s the point that ‘no one is vaccinated until everybody is vaccinated.’ Many countries will be left out in the first rounds, while the rich countries sadly seem to claw the vast bulk of vaccines to themselves. Then there’s the issue of the number of vaccines and recognition of the many vaccines and setting of safety standards. This remains with national health authorities, and they have varying levels of risk tolerance. Consequently, quarantine requirements will persist for many months, and borders will close and open unpredictably, as circumstances change,” Harbison said.
Thus, he concluded, that most long-haul international “trunk routes will not be commercially viable” through 2021 and perhaps longer. “The absence of corporate travel will significantly undermine the economics of long-haul flying.”
As a result, airlines that focus on leisure travelers and flying domestic or short-haul international routes are likely to experience a somewhat quicker and stronger recover in demand than conventional carriers that depend heavily on international and long-haul routes that historically have attracted lots of business travelers. Still, even for discount and short-haul airlines catering to leisure travelers, a recovery is likely to be slow and weak.
Therefore, according to IATA CEO Alexandre de Juniac, the “numbers couldn’t get mush worse” for the global airline industry. And it will emerge from the pandemic-initiated financial crisis as a “poorer and smaller” industry.
IATA chief economist Brian Pearce warns further that extreme caution by governments around the world about reducing or eliminating restrictions of foreign travel means that travel demand won’t return to pre-Covid levels last seen in 2019 until sometime in 2023 or 2024.
And to get to that point, “We will need an effective testing platform to go along beside vaccines,” Pearce added. “And we think that there will be some scarring from the economic crisis and the health crisis.”
De Juniac said he expects that “through failures or through mergers you could see more (airline) consolidation and that makes a lot of sense. But government involvement does complicate things. I see governments that provide taxpayer money (to airlines) being reluctant to see that disappear” through the collapse or merger of airlines into which governments have injected one form or another of bailout money.
Lufthansa Airways, for example, already is emerging as a clear example of that problem. The German government gave Lufthansa $11 billion last year to help it avoid bankruptcy, which is a much tougher and more doubtful process in the European Union than in the U.S. But to get that help Lufthansa officials had to agree to keep employees on the payroll that it most decidedly did not need given the huge drop in travel demand. Additionally, the union representing Lufthansa’s pilots agreed to forego previously promised raises, extra pay for overtime flying a few other goodies. In return, Lufthansa agree not to lay off any of its 5,000 pilots even though it does not need at least 1,100 of them because of the drastic reduction in service it has made to save costs and to balance capacity against the reduced demand it expects to see through the mid-2020s.
There is, however, a problem with that arrangement – and many similar deals around the world, including in the U.S., where governments have provided a safety net that’s tied to keeping excess employees on the payroll. Eventually the reality of reduced demand will force either the elimination of those extra employees from payrolls, or the semi-permanent continuation of government subsidies of airlines. Not only will that put labor-friendly but financially-strapped governments in an untenable position, it is likely to spook investors whose money could be wiped out if labor union demands or actions in the absence of government subsidies force carriers into bankruptcy.
The huge amounts of debt most airlines have added since the pandemic began, on top of what for many already was a substantial debt load, adds even more pressure to the situation. That debt – $167 billion and counting for U.S. airlines alone – threatens to push at least some carriers with the largest debt loads or the least ability to generate revenue toward financial reorganization before passenger demand fully recovers.