COVID-19 Cost of air travel once restrictions start to lift - Brian Pearce Chief Economist - IATA
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COVID-19
Cost of air travel once
restrictions start to lift
Brian Pearce
Chief Economist
5th May 2020
1Will air fares be high or low as borders open?
Usually fares set to stimulate demand but restrictions will raise costs
Factors suggesting lower cost of Factors suggesting higher cost of
air travel air travel
▪ Weak demand ▪ Unit costs increasing if
▪ Low fuel prices - Social distancing required
▪ Excess capacity - Sanitization increases
▪ LCCs potentially returning turnaround times
sooner to market - Infrastructure charges riseIn the first few months of restart demand will be low
Return to work & VFR generate some demand, but consumers cautious
New COVID-19 cases
USA 70.000
EU 60.000
China
50.000
40.000
YoY change in bookings
30.000
0,4 20.000
0,2 10.000
0,0 0
Jan Feb Mar Apr
-0,2
-0,4
-0,6 China,-67%
-0,8
USA,-100%
-1,0 -88%
EU,-100%
Source: IATA Economics analysis based on DDS, ECDC dataCurrently significant overcapacity in the market
With fixed costs to pay the incentive will be to bring back into service
Global fleet by usage, by aircraft type, Jan-May 2020
29.297 29.329 29.349 29.329 29.324
In storage 3.217 4.236 Aircraft in storage
16.184 16.184
15.948 16.707 16.184
20% Widebody jets 26% North America
14% Regional jets 7% Middle East
7% Latin America
In service 26.080 25.093
33% Europe
13.401 13.140 66% Narrowbody jets
12.622
22% Asia Pacific
Africa
5%
Jan Feb Mar Apr May May May
Source: IATA Economics using data from ASCENDCompetition potential to be fierce as markets open up
Despite consolidation 80% seats on routes with 2 or more airlines
Distribution of global routes and seats by number of carriers competing on route, 2019
65.044 5.727.478.992
5 or more carriers 6%
4 carriers 5%
3 carriers 9% 29%
80% of seats
2 carriers 21% are on routes
15% where several
carriers
17%
compete
1 carrier 59% 19%
20%
Routes Seats
Source: IATA Economics based on SRS Analyser dataThe largest variable cost, fuel, will be lower than before
Excess supply of oil should keep fuel unit costs low as restart begins
Actual oil prices up to 29 Apr 2020, oil futures afterwards
USD/barrel Actual oil prices
Oil futures curve in Apr 2020
140
130
120
110
100
90
80
70 66
60
50
40
30
20
10 21
0
1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018 1/1/2019 1/1/2020 1/1/2021 1/1/2022 1/1/2023 1/1/2024
Source: IATA Economics using data from Refinitive DatastreamAs markets open, airlines will try to stimulate demand
Air fares were cut 40% as China’s domestic market re-opened
Bookings (thousand passengers) China domestic fares Fares (USD)
1.600 China domestic bookings 160
143
1.400 140
1.200 120
-41%
1.000 100
84
800 80
600 60
400 40
+235%
200 20
0 0
1 1 1 1 29
Jan Feb Mar Apr Apr
Source: IATA Economics using data from DDSSocial distancing on aircraft would challenge viability
Leaving seats empty raises unit costs and could reduce unit revenues
Aircraft with a 3-3 seat configuration, if middle seats Average break-even load factors by region
have to be left empty
Africa and
Available seat 75%
Middle East
Seat left empty
Asia Pacific 81%
Europe 79%
Latin America 79%
North America 75%
North Asia 76%
67%
Source: IATA Economics using data from The Airline AnalystMaximum load factor falls to 62% with other aircraft
Social distancing removes higher proportion of seats vs narrow-body
Available seat
Seat left empty
Narrow-body Wide-body Regional jet Turboprop
Equipment name A320 B777-300 Passenger E-190 DHC-8-400
Number of seats (avg.) 168 373 101 77
Per-pax cost with 80%
$86 $202 $87 $61
load
Seat configuration if
social distancing
Weighted average: 62%
Max. load factor if social
67% Empty 60% Empty 50% Empty 50% Empty
distancing
Per-pax cost with social $129 $337 $176 $123
distancing and 80% load
Increase in per-pax cost +50% +67% +101% +102%
Source: IATA Economics based on data from SRS Analyser and IATA’s 2018 ACMG benchmarking reportWith social distancing on aircraft few airlines break even
In 2019 only 4 airlines had breakeven load factors less than 62%
EBIT Break-even load factors (LFs) of 122 airlines, most recent year available (%)
140%
120%
100%
80%
60% 62%
40%
20%
0%
Profitable below 62% LF Loss-making below 62% LF
▪ Of a sample of 122 airlines, only 4 could break even at load factors below 62%
▪ The other 118 airlines, with their current pricing policies, would become loss-making at load factors
below 62%
Source: IATA Economics using data from the Airline Analyst and SRS AnalyserFares 43-54% higher to get breakeven if 62% seats limit
Unit costs would rise sharply with fewer seats. Zero profits assumed.
2019 average base fares vs. estimated minimum average base fares if max. 62% of seats can be filled and
airlines only break even (i.e. make no profits)
Average fare, 2019
▪ To break even while selling
Adjusted fare (est.)
fewer seats, airlines would
need to increase fares
+43%
+43% ▪ Depending on the region and
289 its baseline average
259 +54% +50%
+49% achieved load factor, we
+45%
expect the fare increase to
218 219
201 202 195
be between 43-54%
181
▪ This is based on estimated
141 146 achieved load factors of
135 135
53% (62% weighted average
cap on seats times 85%
assumed load factor, to
account for benefits of
capacity optimization with
current oversupply in market)
Africa and Asia Pacific Europe Latin America North America North Asia
Middle East
Source: IATA Economics based on data from the Airline Analyst, DDS and SRS AnalyserFares low initially, but air travel could become costly
Restrictions on seats and aircraft utilization will increase unit costs
Short run Long run
Fuel prices
Fuel prices very low
- Economy and fuel prices
recovered
-
Downward
Most of fleet grounded Capacity matches demand
pressure Excess capacity
on fares
-
Low passenger confidence and
Capacity matches demand
Weak demand lower discretionary income
Cap on load factors prevents Significant constraint on
Lower utilization
optimal utilization of aircraft capacity utilization
Upward
pressure
Increased unit cost, e.g. crew
on fares Increase in Increase in costs may be
time
operating costs passed on in faresContacts economics@iata.org www.iata.org/economics
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