Reverse thrust: Air travel back to where it was 14 years ago

Lufthansa aircraft parked up on a runway at the airport in Frankfurt. Photo / AP

As more New Zealanders start flying around the country and the global airline industry is showing more stuttering signs of recovery, it still faces its worst-ever year for financial performance.

It is estimated airlines will lose about $57 for every passenger carried and already there have been high-profile casualties including Latam and fellow South American carrier Avianca (which are in Chapter 11 bankruptcy), while Virgin Australia collapsed into voluntary administration in April.

Governments have provided emergency aid running to $200 billion, including in this country where a $900 million bailout loan has been provided for Air New Zealand, which says it may start tapping into within the next few months.

This week Cathay Pacific got a US$5b (NZ$7.6b) Hong Kong government lifeline in return for a 6 per cent stake in the airline battered by its near-total grounding by Covid-19 but also political unrest in the territory which started a year ago.

Since the coronavirus hit in January about 800,000 airline employees around the world have been subsidised by governments.

As border restrictions were imposed from March, about two-thirds of the world's passenger fleet was grounded at one stage, and according to route analysing firm OAG, global capacity in June is expected to be 62 per cent lower than last June. Air New Zealand will put 15 Boeing 777 aircraft in "deep storage" in Alice Springs.

This is a slight improvement on May, when overall capacity was 63 per cent lower than last year when there were about 110 million seats a week on offer.

Some Air NZ planes are heading to deep storage in Alice Springs. Photo / Getty

Just on 14 years of passenger growth will be lost around the world this year.

In New Zealand, domestic capacity has built up more quickly than forecast when the
Covid-19 crisis was emerging.

Air New Zealand has about 55 per cent of domestic capacity running but it is uncertain when the lucrative end of the market - corporate and government travellers - will start booking in high numbers.

Jetstar paused operations in March but will start 60 per cent of its domestic network in this country from July. It sold 15,000 tickets within 24 hours of going on sale earlier this week.

Air New Zealand is also cautiously expanding its international network. Later this month it will operate one return service a week to Japan (down from up to 10 pre-Covid) and still just has a handful of flights a week across the Tasman and to the Pacific.

Its skeleton service to Los Angeles and Hong Kong is freight-heavy and the airline has said a return to anything approaching its former long-haul network won't come until next year.

The airline believes until there is a vaccine or effective treatment of elimination of the disease in key markets, the Government will not fully open its borders although there are growing hopes Tasman and Pacific bubbles will be in place before then.

Airlines

One analyst is factoring in the resumption of transtasman flights in October and the Pacific from early next year with initial loads just 40 per cent of pre-Covid business.

In the meantime it faces a full-year loss and having to lay off more staff as it slashes $150 million more in labour costs over the next four months.

The airline has already laid off 4000 staff while around the world other carriers have also sacked tens of thousands of workers.

The International Air Transport Association (IATA) in its latest financial outlook says airlines are expected to lose US$84.3b ($128b) this year for a net losses of 20 per cent. Revenues will fall 50 per cent to US$419b from US$838b in 2019. In 2021, losses are expected to be cut to US$15.8b as revenues rise to US$598b.

"Financially, 2020 will go down as the worst year in the history of aviation. On average, every day of this year will add $230 million to industry losses. In total that's a loss of $84.3 billion. It means that — based on an estimate of 2.2 billion passengers this year — airlines will lose $37.54 per passenger," said the association's director-general and chief executive Alexandre de Juniac.

While traffic was slowly improving, passenger numbers will roughly halve to 2.25 billion, approximately equal to 2006 levels.

Aircraft have been flown near empty in spite of new health measures for passengers and crew. Photo / AP

Capacity, however, cannot be adjusted quickly enough, with a 40.4 per cent decline expected for the year.

Load factors are expected to average 62.7 per cent for 2020, some 20 percentage points below the record high of 82.5 per cent achieved last year.

Costs are not falling as fast as demand. Total expenses of $517b are 34.9 per cent below 2019 levels but revenues will see a 50 per cent drop. Non-fuel unit costs will rise sharply by 14.1 per cent, as fixed costs are spread over fewer passengers.

Lower utilisation of aircraft and seats as a result of restrictions will also add to rising costs.

Bumpy flight to recovery

The recovery would be challenging, said de Juniac, with a number of deeper recurring and new problems to deal with.

Debt: After a decade of profits, debt levels were relatively low and while vital financial relief measures by governments have kept airlines from going bankrupt, debt has ballooned debt by $120b to $550b, which is about 92 per cent of expected revenues next year.

Further relief measures should be focused on helping airlines to generate more working capital and stimulating demand rather than further expanding debt, he said.

Operational efficiencies: The global measures agreed for the industry re-start, for the period that they are implemented, will significantly change operational parameters. For example, physical distancing during embarkation/disembarking, more deep cleaning and increased cabin check will all add time to operations which will decrease overall aircraft utilisation.

Recession: The depth and duration of the recession to come will significantly impact business and consumer confidence. Pent-up demand is likely to drive an initial uptick in travel numbers but sustaining that is likely to require price stimulus and that will put pressure on profits.

Confidence: Travel patterns are likely to shift. The gradual opening up of air travel is likely to be progressive, starting with domestic markets, followed by regional and, lastly, international. Research suggest that some 60 per cent of travelers will be eager to recommence travel within a few months of the pandemic coming under control. The same research also indicates that an even greater percentage of potential travelers until their personal financial situation stabilises (69 per cent) or if quarantine measures are in place (over 80 per cent).

"People will want to fly again, provided they have the confidence in their personal financial situation and the measures taken to keep travelers safe."