As the world began to shut down in March 2020, our highways and byways went quiet. So too did the skies, and their piercing blue was no longer criss-crossed with condensation trails. National and international restrictions on travel wreaked financial devastation on the aviation industry.
A recently published McKinsey report confirmed what everybody knew: that all subsectors of the industry, except freight forwarders and cargo airlines, suffered huge losses throughout the pandemic. In 2020 alone, airlines “haemorrhaged” $168 billion (about €159 billion) in economic losses. Aviation has been here before – post 9/11 and during the economic crash, to name just two examples. But as people begin to take to the skies again, what does the future hold for everyone involved in air travel?
Cathal Guiomard is a former commissioner for aviation regulation and assistant professor of aviation management at Dublin City University Business School. He says that the pandemic has weakened the financial position of airlines and airports, making them less well placed to plan for the future in terms of expansion. Guiomard also points out that while the recovery in air traffic has been strong overall, it has been uneven, affecting different airlines in different ways.
“The low-cost short-haul carriers in some instances have reintroduced routes and flights up to and beyond what they had back in 2019 so they have come back to normal as such, but the long-haul companies are only back to 50 per cent of what they had in 2019,” he admits. “It’s an extremely uneven recovery and it leaves the airlines unsure as to whether there has been a permanent drop in long-haul travel or whether it’s just slower to return.
“If this traffic does recover, then there will be a positive outlook for the airline industry, despite their large debts, but if some of those shifts prove to be permanent that’s a very different story.”
The continued strong performance of the airline cargo subsector of the industry is no surprise to Guiomard, who points out that this was how PPE and medical equipment were transported around the world at the height of the pandemic. “The cargo transport element is more important than people realise and it is probably more important than it ever was. It is crucial.”
Kieran O’Brien, head of aviation finance advisory with KPMG, acknowledges that the pandemic had a significant adverse impact on all businesses involved in aviation. He adds, however, that the sector has shown “excellent resilience” in that time, with support from leasing companies and governments being instrumental in the survival of a number of airlines. “It has been hugely encouraging to see that, once restrictions lift, pent-up demand is significant and the recovery in air travel is underway strongly in most parts of the world,” he adds.
Guiomard has an even bleaker take on what the pandemic may have done for air travel in a broader sense. He warns that some of the unprecedented unilateral actions taken, such as border closures and travel bans, may have long-lasting implications. “Through a very protracted process over half a century aviation was liberalised,” he explains.
“Restrictions were lifted and airlines were privatised and could essentially decide where they want to fly. But one of the impacts of Covid has been a large step backwards, with Government investment in airlines again and a partial reversal of privatisation. We had bans on travelling and border closures, and it feels like we are moving away from the era where airlines were free more or less to fly wherever they wished. The big question now is whether some of that lost ground can be made up.”
Guiomard also warns that the war in Ukraine will be more consequential in the medium term than Covid was for the wider industry. “The airlines’ finances are weakened and this complicates life for leasing companies but it hasn’t been devastating for them. The loss of aircraft in Russia is for some far more serious.”
Yet he points out a positive angle: the global pressure to reduce emissions results in pressure to use the newest aircraft “so the leasing companies are in a position to provide those in as much as the airlines have the funds”.
Joe O’Mara, head of aviation finance with KPMG, believes that the pandemic highlighted the resilience of the leasing business model in aviation. “Leasing groups were able to manage liquidity and support their airline customers through the most challenging time we have ever seen,” he says. “This has led to an increase in the importance of the leasing, with lessors funding almost 60 per cent of new deliveries last year. Given that airlines will be severely capital constrained for the foreseeable future, this importance is likely to continue for the foreseeable future.”
Ireland continues to be the world leader in aircraft leasing, however, notes KPMG’s O’Mara. “The recovery in air travel is evident, the importance of the leasing channel has grown, Ireland remains at the centre of the leasing world and there will be need for airlines to fund new more fuel-efficient aircraft in the near term.”
There has been a significant increase in repositioning of aircraft for new leases and new sales, says Carol Lynch, partner at BDO Customs and International Trade. “This is to be welcomed as it shows the aircraft industry focusing on getting aircraft back in the skies after the Covid years. We are also seeing a lot of new airlines start up in 2022, continuing a trend from 2021,” she says.
With the increase in global security concerns, Lynch points out that companies need to be aware of their due diligence requirements when signing up to new leases and also when supplying aircraft parts. “These issues also need to be looked at in contracts,” she says.
As the world emerges blinking into the endemic Covid reality, some of these issues will be teased out at the Airline Economics Growth Frontiers Dublin conference at the RDS on May 8th-11th, where representatives from all stakeholders in the aviation industry will gather to discuss its future. But despite the overwhelming challenges the industry has faced in recent times, Guiomard remains optimistic.
“The aviation industry, particularly the long-haul providers, offers a service for which there is no substitute. As long as that remains the case, there is a very solid basis for demand for the industry’s services.”