The airline industry in Europe – a fragile recovery from the pandemic | Calamatta Cuschieri

Markets summary

The operational and economic impact of COVID-19 on the aviation industry has been unprecedented. The pandemic disrupted the whole aviation supply chain, affecting not only transportation but also sectors that depend on air transport in their distribution channels.

In Europe, many countries had serious outbreaks and they fought the pandemic by curbing international travel, which led to catastrophic implications for the air transport sector. According to the International Air Transport Association (IATA), the number of air travel passengers in Europe dropped by 70.7% in 2020, compared to 2019 figures.

Even well-established companies have suffered as a result. International Airlines Group (IAG), an airline holding company that incorporates British Airways, Air Lingus, and Vueling among others has reported a 70% drop in revenue compared to 2019 figures. Lufthansa, the German airline giant, reported a 68% drop last year that translated into a €7.1 bn loss of operating activities.

In such conditions, companies applied stringent cost reduction measures: they discontinued several of their regularly operating flights, laid off staff, and cut back on marketing costs. Even still, some companies needed to channel in additional funding to secure their future operations. Air France-KLM, IAG, and Easyjet all completed capital increases in rights issues. A rights issue makes it available for the company’s existing shareholders to purchase additional shares of the company, at a discount to actual market prices, thereby gaining access to additional funding.

However, the tumultuous market conditions are also seen as an opportunity by some market participants, and as a consequence, the industry landscape might even change in the near future. For instance, low-cost airline EasyJet recently rejected a takeover offer from an unnamed competitor, widely reported to be the Hungary-based rival Wizz Air.

The future of the air transportation industry remains uncertain and subject to a number of factors. IATA and Eurocontrol, an international organization focused on the air transportation industry, both project different scenarios for the future of European air travel. Their base case predicts that the number of flights will only return to close to pre-COVID levels by later in 2024 while their optimistic case projects a recovery around the second half of 2023 or early 2024. However, Eurocontrol said in August that the region’s flight numbers exceeded even its best-case recovery scenario that gives rise to some optimism.

Although, as winter is approaching in the northern hemisphere, it is uncertain, whether the vaccination rate of the population will be enough on its own to prevent the occurrence of serious outbreaks. In case strict lockdowns will be needed, they will have a serious impact on travel demand and consequently on the revenue of airline companies. However, changes in travel restrictions can have a big impact on demand in both ways. For example, according to IATA, forward bookings for travel from the UK to Portugal surged from around 80% below 2019 levels to 40% above 2019 levels in less than two weeks when Portugal was added to the UK green list in May 2021.

In addition, from a historical perspective, the third quarter of a calendar year generates the most revenue for European airline companies. No actual financial data is available as of yet although from their bookings we can conclude that airliners probably had a better third quarter this year: seats were around 70% of Q3 2019 booked in Q3 2021 compared with Q3 2020 capacity at just 39%.

Another interesting factor influencing the market itself is a reaction from the customers that seems to be emerging: in response to uncertainties, customers are booking their tickets closer to their travel dates, which means to airline companies that those that can flexibly react to sudden spikes in demand will be able to generate more revenue.

All of the above factors demonstrate the fragility of Europe’s air travel market that we can look at with a hint of cautious optimism. It is close to certain however that we will be seeing the impact of the pandemic on this sector for years to come. Domestically a poorly performing airline sector could well remain to be a drag on the economic performance of Malta as well, and it seems that the recovery pace might take longer than originally expected. Its duration is uncertain at this point, however, we are most probably heading in the right direction.
 

Disclaimer: This article was issued by Tamas Jozsa, Research Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view, and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.