Positive demand for global air passenger travel is expected to hold firm in the near term, according to the International Air Transport Association (IATA), despite airlines having to balance the challenge of absorbing stiff price rises or passing those costs onto passengers.
In TFWA’s Travel Outlook H2 2022 webinar hosted today (19 July), IATA Economist and Policy Analyst Martina Bednarikova painted an optimistic picture for the recovery trajectory of international pax volumes in 2022, aided by relaxed travel restrictions and the global vaccination rollout.
However, the air transport sector continues to face a cocktail of pain points – from airline operating pressures linked to the escalating costs of jet fuel – currently around $170 per barrel – and Brent crude; rising inflation; and the ripple effects of the Russian/Ukraine war on commodity exports.
“Obviously absorbing high costs after two-and-a-half years of the global pandemic might be an issue for certain airlines in some regions, and some might think this will actually discourage demand,” observed Bednarikova.
“We do not think that increasing energy prices will impact demand as much. There are quite a few reasons for this. People really do want to travel and pent-up demand is there; they are willing to pay a little extra to travel; and they accumulated some extra savings from the pandemic when interest and inflation was at a lower rate, so the [cost] increases in some regions may not affect household incomes as much.”
Airlines hedging their bets
In a Q&A, TFWA Managing Director John Rimmer pressed Bednarikova on why IATA is confident that cost increases for airlines wouldn’t have a long-term negative impact on traffic demand – the crucial financial artery for beleaguered DF&TR businesses – at a time of spiralling airfare prices and travellers’ concerns around the costs of living, with incomes not rising in line with inflation.
Bednarikova responded by referencing the practices of European airlines, some of which have hedged prices on jet fuel to around 60% to offset cost pressures.
She reiterated the strong willingness and pent-up demand for travel, demonstrated by the so-called ‘revenge travel’ phenomenon.
Delivering an appraisal of the passenger traffic recovery trajectory by region, Bednarikova pointed out that international pax is gradually returning despite the shockwaves of the pandemic.
IATA monthly statistics demonstrate that the North Atlantic, North America and Europe/Middle East revenue passenger kilometres (RPKs) are trending above 2020 levels, webinar attendees heard.
Asia Pacific’s closure to international markets for a prolonged amount of time has muted the recovery, though the context is changing in some areas such as Australia and New Zealand and in tourist markets such as Thailand and Vietnam, which are reopening. This trend is expected to progress, adds IATA.
Global international and domestic bookings remain buoyant, boosted by summer vacation travellers and fewer restrictions, notably benefitting Europe.
May bookings for the region were almost at pre-crisis levels in several tourist destinations, according to IATA Economics drawing on data from its Direct Data Service (DDS).
“What is interesting is the gap between international and domestic bookings is narrowing; people have been stuck at home for two-and-a-half years and want to travel,” said Bednarikova, though she cautioned on ‘overinflated’ demand that could soften after the summer.
“Passengers forecasts still very much rely on the willingness of people to travel and get out,” she continued. “In terms of the booking profiles we’ve been monitoring, the war in Ukraine didn’t have much effect.
“There are a few elements: the conflict was limited to a location within Europe and also to the size of the air transport industry in Ukraine. Shortly after, bookings went back up and the trajectory is increasing.”
Forecast recovery from 2023 onwards
IATA forecasts that industry financials will remain negative this year due to the onerous cost increases faced by airlines, though this will obviously differ by region.
While airlines’ operating margins in North America are tipped to be back in the black in 2022, regions including Asia Pacific continue to be sluggish.
More positive numbers could emerge in 2023/2024 with a forecast return to 2019 passenger levels, but this will be closely linked to pent-up travel demand and airline hedging factors, continued Bednarikova.
The Americas is estimated to recover in 2023, joining Europe, but Asia Pacific and Africa are not tipped to return to 2019 pax volumes until 2024/2025.
Conversation switched to airports, including Heathrow, which have moved recently to impose caps on daily passenger numbers.
Touching on the ‘unfortunate situation’ of lengthy check-in queues and delays at baggage reclaim at airports across Europe that have played out in recent months, she said: “Airports say that an airline should limit capacity, which is obviously saying that you cannot make profit as we [the airport] are not ready for that.
“That is a very interesting and unreal ask for airlines that have been facing very difficult and challenging times and the only reason they are alive is due to bailouts during Covid.
“The situation is challenging and very difficult to manage considering that airlines’ staff were either laid off or offered voluntary redundancies during Covid as labour costs are obviously a big chunk of total costs for airlines. The challenge is cooperation between the airlines and airports and how they will solve this issue.”
On the current labour shortages being witnessed across European airports and elsewhere, resulting in flight disruption, she clarified: “This is not just the airline industry, the problem is [across] the whole supply chain – airports, ground handlers, security staff… All these elements will need to be coordinated to ease the negative effects we are experiencing at the moment.”
Asked by TFWA’s Rimmer whether the labour issue could quicken airline consolidation, Bednarikova said while consolidation could materialise in the long-term, existing labour shortages should not present the main reason for this occurring.
“We would estimate that these kind of labour shortages will be resolved in the coming months with staff being re-qualified, retrained and being able to fly again, but obviously the industry has been struggling with pilot shortages for a long time,” she commented.
With many aviation stakeholders targeting net zero emissions in 2050, Bednarikova acknowledged this as a ‘challenging ask’, but said it is possible to achieve with interconnected support from governments and stakeholders to funnel investment.
“Net zero by 2050 – any energy transition – will need government support either through long-guarantees or loans,” she explained,.
She cited sustainable aviation fuels (SAF) as an example of a resource that currently occupies a small share of total jet fuel, yet more refineries are emerging that will help to increase supply.
Hosted via the TFWA 365 digital platform, the Travel Outlook H2 2022 webinar explored current and future trends in international travel and tourism.
Alongside IATA, m1nd-set and the European Travel Retail Confederation (ETRC) shared critical research and information on regulatory issues shaping the travel rebound.
More to follow…