COVID-19

Outlook for the airline

industry 2020-2021

Brian Pearce
Chief Economist
9th June 2020
1
 Phased re-opening of air travel markets
RPKs rising first on domestic markets and later on international in 2020
Global RPKs, billion per month
800

700

600
Billions, monthly

500 -36%

400

300

200

100

0
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21

Source: IATA Economics using data from IATA Statistics

 Return to air travel driven by confidence and access
We used COVID19 trajectories and passenger survey to time restarts
International recovery assumed to come in phases
Passenger survey*
100% Lost demand
90% due to
confidence • Countries with weekly new Covid-19 <50 per 100k people
80% effect and and daily new cases <1000 start to open up between each
70% recession Phase 1 other.
60% Mid June- • Mainly countries within Europe and within Asia
50% July
40%
Potential
30% Demand
2H 2020
20% • Regions that are affected by Covid-19 with a lag compared
10% Phase 2 to Europe assumed to contain the virus and start to open
0%
Q3

• Long-haul travel assumed to start to resume

Phase3
Not wait at all Wait a month or two Wait more than six months
Q4

*Based on IATA passenger survey conducted in April 2020, average of

representative countries are used as an indication of regional average.

Source: IATA Economics using data from WHO and IATA passenger survey
 Air cargo services in strong demand relative to capacity
Disappearance of passenger belly capacity created significant shortage
Cargo tonne kilometers flown, capacity and load factors
110 61%
Cargo load factor
Indexed to equal 100 in December 2019

58%

% available cargo tonne kilometers

100

55%
90

52%
80
49%

70
46%
Cargo traffic (CTKs)
60
43%
Cargo capacity (ACTKs)

50 40%
Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20

Source: IATA Economics using data from IATA Statistics

 Collapse of passenger revenues led to large cash burn
On top of unavoidable cost, ticket refunds will burn cash in 2020 Q2

Cash burn of
$61bn in Q2

Source: IATA Economics https://www.iata.org/en/iata-repository/publications/economic-reports/covid-19-cash-burn-analysis/

 Governments have provided substantial cash aid
Airlines kept on life support in 2020 but majority of aid has to be repaid
Government aid made available to airlines due to COVID-19, by type (USD bn) Reimbursable / deferral only
Non-reimbursable / waiver/ discount

Loans 50

Wage subsidies 35

Loan guarantees 12

Equity financing 11

Ticket taxes 9

Corporate taxes 3
Operating subsidies/
2
Route funds
Cash injections 1

Fuel taxes 1

Total 123

Source: IATA Economics

 Airlines will enter ‘restart’ with very high levels of debt
$120bn rise in debt but <$30bn new equity ($11bn from Govt)

Government Banks, capital markets, lessors

Source: IATA Economics using data from own estimates of Government aid, private debt estimates from Airfinance Journal ‘Cash
Burn and Liquidity Webinar, 14 May 2020. Debt includes adjustment for operating leases.
 Demand for air cargo and travel will rise sharply in 2021
Stronger volumes next year but demand remains well below 2019 levels
Global passenger kms (RPKs) and cargo tonne kms (CTKs) flown
110
+25% vs 2020
100 Cargo tonne kilometers flown +3% vs 2019

90
Index to 100 in 2019

80
+55% vs 2020
70 -29% vs 2019

60

Passenger kilometers flown

50

40

30
2007 2009 2011 2013 2015 2017 2019 2021

Source: IATA Economics using data from IATA Statistics

 Need to generate cash and stimulate demand initially
Low passenger yields but higher unit costs will squeeze profit margins
Non-fuel unit costs and passenger yields
140
Impact of
130 fixed costs &
measures
120 reducing
Indexed to equal 100 in 2019

Non-fuel unit cost utilization

110

100

90
Impact of
80 Passenger yield pressures to
70 stimulate
demand
60

50
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: IATA Economics Economic Performance of the Airline Industry, Mid-Year 2020
 Profit margins devastated in all regions this year
Net losses of 15-30% of revenues as some costs unavoidable
Net profit as a % of revenue
2019 2020
10%

5%

0%
% operating revenue

-5%

-10%

-15%

-20%

-25%

-30%

-35%
N America Europe Asia Pacific Middle East L America Africa

Source: IATA Economics Economic Performance of the Airline Industry, Mid-Year 2020
 Unprecedented 2020 loss narrowed but not eliminated
After $84bn net loss this year we forecast further loss of $15bn in 2021
60 Airline industry net profits and EBIT margin 15

Net profit EBIT margin

40 10

20 5

0 0

% of revenue
US$ billion

-20 -5

-40 -10

-60 -15

-80 -20

-100 -25
2007 2009 2011 2013 2015 2017 2019 2021

Source: IATA Economics Economic Performance of the Airline Industry, Mid-Year 2020
 Return on invested capital rises but still far from WACC
ROIC improves in 2021 but returns remain below ‘normal’ for investors
Airline industry return on capital (ROIC) and cost of capital (WACC)
15

Cost of capital - investors' expected return (WACC)

10

5
% of invested capital

-5

-10 Return on capital

(ROIC)
-15

-20
2007 2009 2011 2013 2015 2017 2019 2021

Source: IATA Economics Economic Performance of the Airline Industry, Mid-Year 2020
Even before COVID-19 much of the industry was fragile
Only around 30 airlines drove improvement. Long tail of weaker airlines
World's airlines ranked by economic profits
2000

1500 2017

1000 2018

500 2008 Number of

airlines ranked
USD million

0 in order of
economic
0 10 20 30 40 50 60 70 80 90 100 110 120
profits
-500

-1000

-1500

-2000

-2500
Source: IATA Economics using data from a McKinsey study for IATA
Outside the top-30 balance sheets debt levels were high
So many airlines will have fixed obligations of debt to service and repay
Net debt adjusted for operating leases / EBITDAR
8

7
Net debt adjusted for operating leases /

Rest of the industry

6

5
EBITDAR

3 Top-30 airlines

1 Investment grade

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: IATA Economics using data from the Airline Analyst, own estimates
 Projected debt burden not sustainable
Net debt/EBITDAR of 4.6x in 2019 may rise to 16x in 2021
Net debt/EBITDAR
(Note: EBITDAR proxy for operating cash flow)
20

15
ratio, net debt/EBITDAR

10

-5 Not meaningful. Turned negative as

EBITDAR became a large loss

-10
2013 2014 2015 2016 2017 2018 2019 2020 2021

Source: IATA Economics Economic Performance of the Airline Industry, Mid-Year 2020
 Risk that city-pair connectivity may not fully recover
Flows of trade, investment, tourism critical for wider economic recovery
Unique city-pair services & the real cost of air transport for users
25,000 1.80

US$ per tonne kilometer flown, 2019 prices

End year
Unique city-pair services total of 1.60
20,000 different
Number of unique city-pairs

city-pairs
flown 1.40
15,000

1.20

10,000
Real cost of air transport 1.00
for users April
5,000 2020
0.80

0 0.60
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Source: IATA Economics Economic Performance of the Airline Industry, Mid-Year 2020
Contacts
economics@iata.org
www.iata.org/economics