The International Air Transport Association (IATA) presented new analysis showing that the airline industry cannot slash costs sufficiently to neutralize severe cash burn to avoid bankruptcies and preserve jobs in 2021. IATA reiterated its call for government relief measures to sustain airlines financially and avoid massive employment terminations. IATA also called for pre-flight COVID-19 testing to open borders and enable travel without quarantine.

Total industry revenues in 2021 are expected to be down 46% compared to the 2019 figure of $838 billion. The previous analysis was for 2021 revenues to be down around 29% compared to 2019. This was based on expectations for a demand recovery commencing in the fourth quarter of 2020. Recovery has been delayed however, owing to new COVID-19 outbreaks, and government mandated travel restrictions including border closings and quarantine measures. IATA expects full year 2020 traffic to be down 66% compared to 2019, with December demand down 68%.

“The fourth quarter of 2020 will be extremely difficult and there is little indication the first half of 2021 will be significantly better, so long as borders remain closed and/or arrival quarantines remain in place. Without additional government financial relief, the median airline has just 8.5 months of cash remaining at current burn rates. And we can’t cut costs fast enough to catch up with shrunken revenues,” said Alexandre de Juniac, IATA’s Director General and CEO.

Although airlines have taken drastic steps to reduce costs, around 50% of airlines’ costs are fixed or semi-fixed, at least in the short-term. The result is that costs have not fallen as fast as revenues. For example, the year-on-year decline in operating costs for the second quarter was 48% compared with a 73% decline in operating revenues, based on a sample of 76 airlines.

Furthermore, as airlines have reduced capacity (available seat kilometers, or ASKs) in response to the collapse in travel demand, unit costs (cost per ASK, or CASK) have risen, since there are fewer seat kilometers to ‘spread’ costs over. Preliminary results for the third quarter show that unit costs rose around 40% compared to the year-ago period.

Looking forward to 2021, IATA estimates that to achieve a breakeven operating result and neutralize cash burn, unit costs will need to fall by 30% compared to average CASK for 2020. Such a decline is without precedent.

Factors contributing to this analysis include:

With international demand down nearly 90%, airlines have parked thousands of mostly long-haul aircraft and shifted their operations to short haul flying where possible. However, because the average distance flown has fallen sharply, more aircraft are required to operate the network. Thus, flown capacity (ASKs) is down 62% compared to January 2019, but the in-service fleet is down just 21%.
Around 60% of the world aircraft fleet is leased. While airlines have received some reductions from lessors, aircraft rental costs have dropped less than 10% over the past year.
It is critical that airports and air navigation service providers avoid cost increases to fill gaps in budgets that are dependent on pre-crisis traffic levels. Infrastructure costs have fallen sharply because of fewer flights and passengers. Infrastructure providers could cut costs, defer capital expenditures, borrow on capital markets to cover losses or seek government financial relief.
Fuel is the only bright spot with prices down 42% on 2019. Unfortunately, they are expected to rise next year as increased economic activity raises energy demand.
While IATA is not advocating specific workforce reductions, maintaining last year’s level of labor productivity (ASKs/employee), would require employment to be cut 40%. Further jobs losses or pay cuts would be required to bring unit labour costs down to the lowest point of recent years, a reduction of 52% from 2020 Q3 levels.
Even if that unprecedented reduction in labor costs were to be achieved, total costs will still be higher than revenues in 2021, and airlines will continue to burn through cash.

“There is little good news on the cost front in 2021. Even if we maximize our cost cutting, we still won’t have a financially sustainable industry in 2021,” said de Juniac.

“The handwriting is on the wall. For each day that the crisis continues, the potential for job losses and economic devastation grows. Unless governments act fast, some 1.3 million airline jobs are at risk. And that would have a domino effect putting 3.5 million additional jobs in the aviation sector in jeopardy along with a total of 46 million people in the broader economy whose jobs are supported by aviation. Moreover, the loss of aviation connectivity will have a dramatic impact on global GDP, threatening $1.8 trillion in economic activity. Governments must take firm action to avert this impending economic and labor catastrophe. They must step forward with additional financial relief measures. And they must use systematic COVID-19 testing to safely re-open borders without quarantine,” said de Juniac.

Access Can costs be downsized to make the industry cash positive? (pdf) from Brian Pearce, IATA's Chief Economist

Remarks of Alexandre de Juniac at the IATA Media Briefing on 27 October 2020

Thank you for joining this briefing.

Brian has painted a very dismal picture of the airline industry’s prospects in 2021. To survive, airlines will need to bring costs in line with revenues. Doing that is a difficult balancing act because airlines must also preserve the capability to be able to safely and efficiently ramp up operations when demand picks up.

This is particularly challenging when you consider licensed personnel with long training periods. And that uptick in demand looks like it will take much longer than anybody could have anticipated. This crisis is not a few months of downturn. We are looking at much more than a year of severely depressed demand. The decisions taken in the next weeks and months to manage through the crisis will re-set aviation’s trajectory for several years to come.

Careful management of costs will likely not see costs fall in proportion to reductions in flying.

Even with severe fleet reductions, price reductions from lessors are limited and the larger proportion of short-haul flying will force fleet unit costs upwards.
Although fuel costs have fallen with the reduction in flying, there is an expectation of higher fuel prices in 2021.
In the same way, although infrastructure costs have fallen in line with the drop in demand, our infrastructure partners will need to find solutions—including government relief—to fill budget gaps without increasing costs to airlines.

Labor is another major cost item. We are seeing significant job loss announcements as airlines try to adjust the size of the workforce. To maintain last year’s level of labor productivity (ASKs/employee), employment would need to be cut 40%. Further jobs losses or pay cuts would be required to bring unit labor costs down to the lowest point of recent years, a reduction of 52% from 2020 Q3 levels

Today’s analysis is yet another reminder of the need for our two most fundamental requests of governments in this crisis:

Continued financial relief, in forms that do not increase the debt burden, and
Using systematic pre-departure testing to safely re-open borders without quarantine measures

Other Issues

Although the news is bleak, I’d also like to remind everyone that the crisis has not killed the dedication of aviation to continuous improvements. And I have three examples of that this week:

Yesterday I signed an agreement with the World Meteorological Organization aimed at expanding the number of airlines providing weather data during flight operations. This will help make up for the gap created by the sharp reduction in flying. This data collection supports better weather forecasting which has many uses, including safe flight operations.
As we speak, the Global Accessibility Symposium has kicked off with airlines and regulators looking for ways to make travel better for passengers with disabilities—during the crisis and beyond.
And last week we had the good news that aircraft will be able to overfly Israel and Jordan, making flight routings more efficient from a fuel and environmental perspective.

These developments are reminders that aviation is a responsible industry.

I look forward to taking your questions.