The worst period in aviation history has now passed and in some ways, the industry got through the global COVD-19 pandemic better than expected.
Yes, revenues per passenger kilometre (RPK) in 2020 and 2021 were 66 and 58 percent lower than 2019, respectively. Yes, around two-thirds of the global fleet was parked at the worst of the pandemic, and yes hundreds and hundreds of aircraft deliveries were pushed back or cancelled.
But travel demand roared back with the rollout of vaccines and the prospects for a full industry recovery are now much brighter than at the depths of the crisis. The International Air Transport Association (IATA) expects a return to pre-COVID levels by 2023, a whole year earlier than most analysts expected. Maintenance, repair and operation (MRO) spending is growing once again and the two major airframers have either announced or are expected to announce ramp-ups in production.
However, even the most optimistic industry analyst would be hesitant to say that there are clear skies ahead. Challenges old and new could still stop the recovery in its tracks. With the worst (hopefully) behind us and an uncertain future ahead, we take a look at the ten biggest risks to the aviation industry in the post-COVID era.
As of summer 2022, the coronavirus had loosened its grip on global travel. Most countries had dropped testing and quarantine requirements and only a few were still restricting entry.
But the “zero COVID” policy in place in China has made for an uneven industry recovery, with passenger demand in the Asia-Pacific region much lower than in the rest of the world. IATA’s April 2022 numbers, the most recent available at the time of writing, reveal that Asia-Pacific is the only region that still has negative year-on-year RPK numbers (-25% compared to a 302% increase in Europe). Similarly, China’s domestic passenger market is the only one in the red, down 81% year-on-year.
Everyone is eager to move past the COVID-19 pandemic, but the Omicron wave showed the virus is still both highly contagious and unpredictable. Even though most governments have said that they are done with lockdowns, there is still a fear that a new variant could usher in a return of travel restrictions.
The rapid spread of the coronavirus was a vivid reminder of the interconnectedness of our modern world. Viral outbreaks will continue to occur, as the spread of monkeypox demonstrated, and while no one can predict what might be coming, a recent report published in The Lancet concluded that “the world remains dangerously unprepared for the next pandemic threat.”
The global, interconnected nature of the aviation industry means that airlines, lessors, MROs and suppliers are highly vulnerable to external factors out of their control. Pandemics, lockdowns, trade disputes, financial crises and more can depress travel demand and threaten the bottom lines of industry players.
This was laid bare by Russia’s invasion of Ukraine in February 2022. The airspace above both countries was closed and Russian carriers were barred from entering the airspace of many Western nations.
The economic sanctions imposed on Russia meant that many Western aerospace companies halted their operations there. Both Airbus and Boeing had somewhere between 350-400 aircraft operated by Russian carriers when the sanctions were put in place. The two OEMs suspended support for all of these Russian-operated aircraft and major engine manufacturers and engineering companies also halted their operations in the country.
While these moves created hardship for Russian aerospace companies, the impact of the sanctions goes both ways. Russia supplies some 40 percent of the aviation industry’s titanium needs, and even though Russian titanium has not been directly sanctioned, the threat to the supply may force Western companies to look for ways to source it elsewhere. Finding a new source for valuable raw materials would be no small feat in the best of times, but doing it in the midst of a global supply chain crisis (more on that in the next point) is bound to be problematic.
Two years of lockdowns, travel restrictions and shifts in consumer behaviour have snarled supply routes and slowed delivery times. The resulting supply chain problems have affected nearly all sectors of business, including aviation.
A scarcity of vital aviation parts and global logistical challenges have caused lead times for some components to explode, in some cases to more than a year, and have forced airlines, suppliers and MROs to rethink their supply chain strategies.
Engine manufacturers are particularly feeling the crunch after several smaller suppliers of engine components went bankrupt during the downturn and others shifted to producing components for other sectors. There are also shortages of wire components, electronics and raw materials like aluminium and the aforementioned titanium. Used parts are also harder to come by, presenting problems for the aftermarket.
There are legitimate concerns that the industry’s sooner-than-expected recovery will be halted or even reversed by its supply chain challenges.
When US Gulf Coast data showed that the spot price for jet fuel hit $4.10 per gallon on 8 March 2022, it marked the first time prices exceeded the $4 mark since September 2008. Since then, it has only gotten worse. Prices hit as high as $5.07 per gallon in the spring of 2022 and despite some fluctuations were still hovering north of $4 as the summer travel season got underway.
According to IATA’s jet fuel price monitor, global prices in June 2022 were 123 percent higher than in June 2021. Prices are more than double what they were one year ago in large part because of the sanctions on Russian oil and gas put in place as a response to the war in Ukraine.
This is clearly a troubling development for airlines, given that fuel can account for as much as 40 percent of annual expenditures. It’s also bad news for travellers, who are asked to help defray the cost of jet fuel through higher ticket prices. US travellers are paying 33 percent more for domestic flights than a year ago and would-be passengers in Asia and Europe are also facing steep increases. The worst for passengers may be yet to come as airline fares often take months to catch up with fuel cost increases.
Some airlines will be less affected by the price increases than others, as many opt to hedge the cost of jet fuel by purchasing a set amount in advance at a fixed price. An analysis from Reuters found that while some carriers like British Airways are hedged against fluctuating prices for up to two years, others including three of the four largest US-based carriers are not hedged at all and will have to pay the historically high prices.
If jet fuel and airline ticket prices continue to rise, travellers will have yet another powerful disincentive to fly. (See Risk 8)
Strong domestic travel demand, particularly in North America, has driven the industry’s post-COVID recovery. According to numbers released by IATA, domestic RPKs in April 2022 were down 26 percent versus April 2019, but international RPKs were down 43 percent in the same comparison period.
Similarly, COVID-19 air travel recovery figures crunched by global travel data provider OAG show that international airline capacity as of June 2022 was still 30 percent lower than it was three years ago while total domestic capacity was just nine percent below what it was in 2019.
The domestic travel rebound has so outpaced international that there is now a historic imbalance between single-aisle and twin-aisle production. Aviation Week reported that twin-aisle deliveries and backlogs accounted for just 30 percent of the global aircraft market in Q1 2022, the lowest market share since the dawn of the widebody age in the early 1970s. According to the report, “twin-aisle orders have now completely collapsed”, with just 54 twin-aisles among Airbus and Boeing’s cumulative 1,416 net new jetliner orders in 2021.
Demand for narrowbodies is so strong that Airbus plans to increase its production of the A320 family of aircraft over the next three years, eventually cranking out 75 of the single-aisle aircraft per month by 2025. At the time of writing, Boeing had not formally announced its future plans but was expected to ramp up production of its 737 narrowbody line over a similar timeframe.
While narrowbodies taking a greater market share than ever before may not in and of itself be a problem, the OEM production plans indicate serious reservations about long-haul travel demand.
At the depths of the coronavirus crisis, many were deeply concerned about the future of business travel – ourselves included. It was widely assumed that the widespread adoption of online meetings would make many companies hesitant to purchase pricey airline tickets for employees who could just click on a Zoom link instead. Add in travel restrictions that made business travel difficult, if not impossible, and an economic downturn that left many companies looking for ways to cut costs, and it looked as if business travel was doomed.
This has largely played out as expected, with an April 2022 analysis from Deloitte finding that corporate travel spending is still 50 percent lower than before the pandemic. There are some signs that news of business travel’s demise may have been greatly exaggerated, however. The same Deloitte report predicts that “corporate travel should grow significantly” throughout the remainder of 2022 and that “companies should begin to settle into their post-pandemic travel norms” by 2023.
Those norms may never match the business travel heyday, though. Even optimistic predictions call for as much as one-fifth of business travel to never return. A lasting 20 percent decline in corporate travel presents a huge risk to airlines that have traditionally relied on selling business-class tickets that can cost as much as ten times the price of regular economy seats.
It’s hard to overstate how important business travellers are to airlines’ bottom lines. Although they are only roughly 12 percent of all passengers, business travellers can account for as much as three-fourths of an airline’s profits. In the trillion-dollar global industry that is corporate travel, even losing ‘only’ one-fifth of all future business poses serious risks.
The events of the past few years have presented all sorts of new challenges to the aviation industry, but they’ve also worsened a problem that long predates the pandemic. Before the world had even heard of COVID-19, aviation was facing a looming labour shortage, particularly among mechanics, technicians and pilots.
After some 1.3 million airline industry jobs were lost in 2020, what was once seen as a future problem is now here. This is more than just an issue of raw numbers, however. Many of those job cuts were senior employees who were offered early-out packages. When they left their positions, they took plenty of valuable experience with them. Even if the industry were able to magically produce new talent, it would take years to make up for that loss of institutional knowledge.
Young people simply aren’t clamouring for aviation jobs. Over the past years, we have spoken with union leaders and industry executives about the difficulties of recruiting and retaining talent. Increased competition for workers from other industries, relatively low pay and poor benefits and the around-the-clock nature of the job were cited as primary challenges.
It’s heartening to see that there are initiatives underway to more aggressively and effectively recruit a younger and more diverse workforce and prior to the pandemic there were signs that the mechanic and technician talent pool was beginning to slowly expand. But this is a problem years in the making and a viable, sustainable solution will likewise take time.
Perceptions of air travel have changed significantly in just a few short years. And we’re not only referring to the health concerns brought on by the pandemic. Even before we all began to suspiciously view our fellow travellers as potential vectors of a deadly virus, there was a small but vocal minority that railed against flying for environmental reasons.
While it may seem like a distant memory now, it was only about three years ago that the Swedish word flygskam (flight shaming) was suddenly on every industry player’s lips. In fact, when we caught up with Martin Harrisson, the global managing director for airlines and MROs at ICF, at MRO Europe 2019, he told us that “the biggest theme for airlines [...] is sustainability and the environment. That is without a shadow of a doubt the theme that is emerging.”
While many in our industry would argue that aviation emissions are unfairly singled out and that great strides in sustainability haven’t received the credit they deserve, public perception is a powerful thing. Rightly or wrongly, the heightened attention on aviation’s carbon footprint will almost certainly return along with travel demand.
The environmental effect of flying may not be the only thing to get people to reconsider buying airline tickets, either. Media reports of “mayhem” and “chaos” at airports in Europe and the US at the outset of the summer 2022 travel season may also make people think twice about booking a flight, as could the disturbing increase in “air rage” incidents.
Perhaps the most important public sentiment is how people feel about their finances. And as of summer 2022, many people weren’t feeling great.
The World Bank’s latest Global Economic Prospects report, released in June 2022, warned that global growth was due to slow to just 2.9 percent this year and remain around there through 2024.
“For many countries, recession will be hard to avoid,” World Bank President David Malpass said.
The World Bank and others are warning that the current global financial situation resembles the ‘stagflation’ of the 1970s. With prices of everyday goods increasing and a steady drumbeat of a looming recession, many would-be air passengers are likely to think twice before springing for airline tickets.
If any one or a combination of the above potential risks sends the aviation industry into full-blown crisis mode again, there is a strong possibility that there will be no governmental lifeline to save it this time around.
The estimated $225 billion that governments worldwide gave airlines during the first 12 months of the COVID-19 crisis staved off bankruptcies and saved thousands of jobs. These weren’t just direct airline jobs, of course. The government aid helped workers throughout the aviation supply chain, including those in the MRO industry.
But the government bailouts were not without controversy. Although a significant portion of the governmental aid took the form of loans that have since been paid back by the airlines – sometimes even earlier than required – taxpayers, politicians and the media may have a hard time squaring the enormous help packages with the ongoing travel problems. Arguments that the government assistance wasn’t actually a bailout are unlikely to endear airlines to the public.
In an ideal world, there will be no reason for the aviation industry to need a new round of assistance. But should the need arise again, governmental purse strings may be pulled much tighter this time around.
These are what we see as the ten biggest risks and challenges the aviation industry faces as we enter the summer 2022 travel season. But there are always two sides to every story. Next month, we’ll be back with the ten biggest opportunities as the industry moves beyond COVID and into the new normal.
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This blog is driven by Satair Marketing & Communication with input from both internal and external contributors.
Satair is a world leading provider of aftermarket services and solutions for the civil aerospace industry. Satair is a stand-alone company and Airbus subsidiary.