The airline industry has traditionally exhibited a strong correlation with GDP growth. In Asia, airlines have a reasonably good history of predicting the impact of viruses on their financial performance given the prevalence of such outbreaks over the past 20 years. When the COVID-19 outbreak occurred models built on data from the SARS (2003) outbreak were used to predict the likely impact and the trajectory of the eventual recovery. There are lessons to be learned from tracing the evolution of the crisis and its worse than expected impact on the airline industry. One key finding is how the models severely underestimated the impact and spread of COVID-19 and therefore their reliability in forecasting an eventual recovery!
Early Indicators – Based on the Past
The airline industry began trying to estimate the impact of COVID-19 back in January when it was widely regarded as an Asian phenomenon and therefore the previous virus models could be applied.
During the SARS outbreak, monthly passenger revenues of Asia-Pacific airlines were about 35% lower than their pre-crisis levels. Overall in 2003, the loss of confidence and fears of global spread impacted both business and leisure travel to, from and within the region, resulting in Asia-Pacific airlines losing 8% of annual passenger revenues. The avian flu epidemics of 2005 and 2013 had a much milder and short-lived impact and air travel rebounded quickly as fears of a global spread of the virus eased.
A key finding of the analysis was that although the severity of the virus seems to have a bigger impact on the decline in passenger numbers, the recovery in all instances seemed to be complete after about 9 months.
In the past, the airline industry has proven resilient to shocks, including pandemics, as today’s chart shows. Even in the outbreak of SARS, monthly international passenger traffic returned to its pre-crisis level within nine months.IATA Economics’ Chart of the Week – 24 January 2020
But there was a recognition that maybe this time things are different! This was based on the very strong growth of the Chinese air transport market as additional 450 million passengers fly to from and within China per year compared with a decade ago. The timing of the outbreak also coincided with New Year celebrations and China’s busiest travel season. The assumption was that while there were risks that this outbreak could cause a sizeable disruption, history indicates that any effect on air transport would be temporary.
Expected Decline Quickly Revised Higher as Impact Accessed
On the 20th of February 2020, IATA issued an initial impact assessment of the emerging COVID-19 pandemic. It noted that the SARS experience may underestimate the likely global impact as China’s economic size is much greater than in 2003 in terms of world trade and share of airline travel.
The analysis concluded that the global industry would suffer $28bn of declines in passenger revenues in 2020, with $27.8bn in the Aisa Pacific region and $12.8bn of this coming from China’s domestic market. The regional impacts outside Asia Pacific Region were based only on the direct exposure to the Chinese markets with no assumption of a spread of the virus. In fairness, the report did provide a caveat on the title page that “This is a preliminary scenario. It is likely to change as the situation evolves and evidence builds.“
A week later IATA reported that the COVID 19 outbreak continues to impact the world with the rise of new cases outside of China, especially in S. Korea, Iran and Italy. It noted that countries with community transmission had spread from Asia to East Asia, Europe and the Middle East and also put areas outside the transmission centres at risk as well. IATA noted that although the evolution of the outbreak in the other regions was at an early stage, it noted that early bookings data showed a sharp fall in demand in Europe and the Middle East.
In early March IATA revised its impact assessment and produced two scenarios, a “Limited Spread” scenario covering countries with 100 confirmed COVID-19 cases or more (as of 2 March) with global passenger revenues falling by €63bn and an “Extensive Spread” scenario covering countries with 10 confirmed cases or more with declines of $113bn.
In late March IATA produced its third impact assessment as markets with severe restrictions cover 98% of global passenger revenues leading to a $252bn revenue hit for 2020, over double the worst losses predicted only three weeks earlier!
The presentation noted ominously that:
This time recovery may not come 6 months after the crisis.
All previous pandemics had a sharp V-shape, but there was no recession.IATA COVID-19 Updated Impact Assessment – 24 March 2020
In mid-April IATA presented its fourth impact assessment and found that the recession alone would push global passenger revenues down 8% in Q3 2020, before taking account of the travel restrictions and impact on consumer confidence. They revised the industry passenger revenue declines down further to $314bn!
In early June IATA forecast that the airline industry would post a record $84bn loss in 2020, which is 3.2 times higher than in the Global Financial Crisis. IATA expects travel demand to gradually recover from the low point in April with the step-by step opening of markets. However, the extremely deep recession and loss of traveller confidence will have an impact on travel demand in the rest of the year. In 2020, passenger revenues are expected to decline by 54.7%, resulting in a 50% loss of industry-wide revenue, despite a more promising cargo revenue performance.
Looking forward to 2021, a return to profitability will be difficult for the industry. Although economic activity is expected to improve sharply in 2021, returning to pre-crisis levels of air transport activity looks unlikely (passenger revenues will be about 30% lower than 2019 levels). The cautious behaviour of travellers will continue to affect travel demand at the start of 2021 and the recovery in business travel will come with a lag. As in the Global Financial Crisis, industrywide losses are expected to extend into a consecutive year. However, the losses in 2021 will moderate to $15bn.
The Consumer is Key
Passenger sentiment remains subdued and according to
the latest survey conducted in June, travellers have
become more cautious about air travel than three
months ago. A total of 45% of respondents stated that
they were intending to fly within two months from the
time the pandemic is contained, down from the 64%
share recorded in April’s survey. The majority now
anticipate a return to air travel no sooner than in six
Based on our latest estimates, air travel demand will start its gradual recovery in Q3 and Q4, but reach 2019 levels only in 2023.IATA – Air Passenger Market Analysis May 2020
Domestic markets are expected to lead the industry recovery from the crisis. International demand will take more time to recover. The rebound will depend on reducing the risk of virus transmission from one country to the other as well as on the strictness of quarantine and other restrictive measures after passenger arrival.
Lessons for the Wider Economy
The airline industry is one of the few global industries that have previous experience of dealing with a virus. The earliest forecasts for declines in passenger revenues were revised downwards quite dramatically as the virus spread very quickly from Asia, unlike previous virus outbreaks. The models failed because of the wider reach of the virus and the accompanying global depression. The recovery period is now forecast at between 24 months to 36 months compared with a 9-month time horizon earlier in the year.
A key lesson from the airline industry is that the COVID-19 crisis has resulted in models failing, losses spiralling and the recovery being pushed further out. What were considered to be dire forecasts, have in hindsight turned out to be too optimistic!