Iata has announced an upgrade to its outlook for the airline industry’s 2022 financial performance as the pace of recovery from the COVID-19 crisis gathers momentum. This was despite oil price increases causing fuel costs to go from 19% of industry overall costs in the 2021 year to 24% in the 2022 year.
• Industry losses are expected to reduce to -$9.7 billion, improved from the October 2021 forecast for an $11.6 billion loss for a nett loss margin of -1.2%. Losses of $137.7 billion (-36.0% nett margin) in 2020 and $42.1 billion (-8.3% nett margin) in 2021.
• Industry-wide profitability in 2023 appears within reach – North America is already expected to deliver an $8.8 billion profit in 2022.
• Efficiency gains and improving yields are helping airlines to reduce losses even with rising labour and fuel costs (the latter driven by a 40% increase in the world oil price).
• Industry optimism and commitment to emissions reductions are evident in the expected nett delivery of over 1 200 aircraft in 2022.
• Strong pent-up demand, the lifting of travel restrictions in most markets, low unemployment in most countries, and expanded personal savings are fuelling a resurgence in demand that will see passenger numbers reach 83% of pre-pandemic levels in 2022.
• Despite economic challenges, cargo volumes are expected to set a record high of 68.4 million tonnes in 2022.
“Airlines are resilient. People are flying in ever greater numbers. And cargo is performing well against a backdrop of growing economic uncertainty. Losses will be cut to $9.7 billion this year and profitability is on the horizon for 2023. It is a time for optimism, even if there are still challenges on costs, particularly fuel, and some lingering restrictions in a few key markets,” said Willie Walsh, Iata Director General.
Revenues are rising as COVID-19 restrictions ease and people return to travel. The challenge for 2022 is to keep costs under control.
“…The improvement in the financial outlook comes from holding costs to a 44% increase while revenues increased 55%. As the industry returns to more normal levels of production and with high fuel costs likely to stay for a while, profitability will depend on continued cost control. And that encompasses the value chain. Our suppliers, including airports and air navigation service providers, need to be as focused on controlling costs as their customers to support the industry’s recovery,” said Walsh.
*Industry revenues are expected to reach $782 billion, this is 93.3% of 2019 levels. Flights operated in 2022 are expected to total 33.8 million, which is 86.9% of 2019 levels. Passenger revenues are expected to account for $498 billion of industry revenues, more than double the $239 billion generated in 2021. Cargo revenues are expected to account for $191 billion of industry revenues.
*Overall expenses are expected to rise by 44% from 2021, which reflects both the costs of supporting larger operations and the cost of inflation in some key items. At $192 billion, fuel is the industry’s largest cost item in 2022 (24% of overall costs, up from 19% in 2021).
*War in Ukraine is keeping prices for Brent crude oil high. A particular feature of this year’s fuel market is the high spread between crude and jet fuel prices. This ‘jet crack spread’ remains well above historical norms, mostly owing to capacity constraints at refineries. Under-investments in this area could mean that the spread remains elevated into 2023. At the same time, high oil and fuel prices are likely to see airlines improve their fuel efficiency – both through the use of more efficient aircraft and through operational decisions.
* Labour is the second highest operational cost item for airlines. Direct employment in the sector is expected to reach 2.7 million, up 4.3% on 2021 as the industry rebuilds from the significant decline in activity in 2020. Employment is still, however, somewhat below the 2.93 million jobs in 2019 and is expected to remain below this level for some time.
The time required to recruit, train, complete security/background checks, and perform other necessary processes before staff are ‘job-ready’ is presenting a challenge for the industry in 2022. In some cases, employment delays may act as a constraint on an airline’s ability to meet passenger demand.
In countries where the economic recovery from the pandemic has been swift and the unemployment rate is low, tight labour markets and skill shortages are likely to contribute to upward pressure on wages.
*The global macroeconomic backdrop is critical for the industry outlook. The forecast incorporates an assumption for solid global GDP growth of 3.4% in 2022, down from the strong 5.8% rebound last year. Inflation has risen and is expected to remain elevated throughout 2022, waning over the course of 2023. And, while nominal interest rates are rising, real interest rates are expected to remain low or negative for a sustained period.
Risk factors reported in the outlook were:
The war in Ukraine
The impact of the war in Ukraine on aviation pales compared with the unfolding humanitarian tragedy. The outlook assumes that the war in Ukraine will not escalate beyond its borders. Among the many negative impacts of an escalation for aviation, rising fuel costs and a dampening demand due to lowered consumer sentiment would be paramount.
Combined, the Russian international market, Ukraine, Belarus, and Moldova accounted for 2.3% of global traffic in 2021. In addition, about 7% of international passenger traffic (RPK) would normally transit Russian airspace (2021 data), which is now closed to many operators, mostly on long-haul routes between Asia and Europe or North America. There are significantly higher costs for re-routing for those carriers affected.
Just under 1% of global freight traffic originated in or is transited through Russia and Ukraine. The greater impact is in the specialised area of heavy-weight cargo where Russia and Ukraine are the market leaders, and the corresponding capacity loss will be difficult to replace. And about 19% of international cargo shipments (CTKs) transits through Russian airspace (2021 data). Carriers impacted by sanctions face higher costs for re-routing.
Inflation, interest rates, and exchange rate
Interest rates are rising as central banks combat inflation. Aside from those carrying debt (who will see inflation devaluing their debts), inflation is harmful and has the economic dampening effect of a tax by reducing purchasing power. There is downside risk to this outlook should inflation continue to rise, and central banks continue to hike interest rates.
Moreover, the record strength of the US dollar, if it continues, will have a negative impact as a strong US dollar is growth-dampening in general. It increases the local-currency price of all USD-denominated debt, and adds to the burden of paying for USD-denominated fuel imports as well.
“Governments must have learned their lessons from the COVID-19 crisis. Border closures create economic pain but deliver little in terms of controlling the spread of the virus. With high levels of population immunity, advanced treatment methods, and surveillance procedures, the risks of COVID-19 can be managed. At present, there are no circumstances where the human and economic costs of further COVID-19 border closures could be justified,” said Walsh.
China’s domestic market alone accounted for about 10% of global traffic in 2019. This outlook assumes a gradual easing of COVID-19 restrictions in the second half of 2022. An earlier move away from China’s zero COVID policy would, of course, improve the outlook for the industry. A prolonged implementation of the COVID-19 policy will continue to depress the world’s second largest domestic market and wreak havoc with global supply chains.
Iata’s North America region is expected to continue to be the strongest performing region and the only region to return to profitability in 2022.
In Europe, the Russia-Ukraine war will continue to disrupt travel patterns within Europe and between Europe and Asia-Pacific. However, the war is not expected to derail the travel recovery, with the region edging closer to profitability in 2022.
Asia-Pacific – strict and enduring travel restrictions (notably in China), along with an uneven vaccine roll-out, have seen the region lag in the recovery to date.
Latin America recovered robustly in 2021, supported by domestic markets and relatively fewer travel restrictions in many countries. The financial outlook for some airlines, nevertheless, remains fragile.
Middle East – region-wide, nett losses are expected to narrow to $1.9 billion in 2022.
In Africa, lower vaccination rates have dampened the region’s air travel recovery to date. However, some catching up is likely this year, which will contribute to an improved financial performance. Nett losses are forecast to be $0.7 billion in 2022. Demand (RPKs) is expected to reach 72.0% of pre-crisis (2019) levels, and capacity 75.2%.