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Airline industry alarm as vaccine-led recovery hopes take a dive

Johan Lundgren wasted no time in dashing off a letter of complaint when a UK government minister recently warned it was too early to even think about booking a summer break.

The exasperation from Lundgren, the chief executive of easyJet, Europe’s second-biggest low-cost carrier, is understandable because the stakes are so high for an airline industry whose hopes for a vaccine-led recovery this year are already in jeopardy.

The pandemic shut the skies abruptly last spring, bludgeoning the industry as it endured the largest decline in flying since the second world war. Less than two months into this year, the danger facing airlines is more akin to a slow strangulation as country by country travel restrictions are tightened and, in some cases, borders closed to prevent new variants of Covid-19 spreading.

For an $800bn industry built on moving people around, it is an alarming picture. Europe and the US have tightened travel restrictions; the UK introduced tougher quarantine rules on Monday while Australia’s borders are expected to stay closed until the end of the year.

“Ever changing travel restrictions like quarantines are the single biggest barrier to customer bookings,” Lundgren told the FT.

Andrew Charlton, an aviation consultant, puts it bluntly: “The countries that have been really good at suppressing the virus have done it by killing international aviation.”

New Zealand is among the nations to have pursued such an approach — its flagship airline carried just 6,000 long-haul passengers in December.

Even as vaccines continue to offer a long-term solution to Covid-19 — and most carriers still believe that this year will ultimately be better than last — signs of the renewed pressures are multiplying.

The number of flights in European airspace has this month plunged to the lowest level since the first strict lockdowns were imposed last spring. Despite a domestic airline market buoyed by an economic recovery, China’s recovery has faltered as Beijing discouraged travel over the lunar new year.

Carriers have slashed their already meagre ambitions for the first quarter, with easyJet and rival Ryanair expecting to fly just 10 per cent of their normal schedules.

In a sign of how the pandemic is again confounding the industry’s expectations, the International Air Transport Association, which represents airlines globally, admitted there is a growing risk that passenger numbers for this year will fall short of its projections.

“We had been basing our forecasts on governments being able and willing to start lowering travel restrictions once the vulnerable part of the population has been vaccinated,” said Brian Pearce, Iata’s chief economist. “I think what we have seen in recent weeks is governments taking a much, much tougher, more cautious approach.”

With the outlook for carriers appearing to grow more fraught by the day, the ramifications run far deeper than ripping up passenger forecasts.

Travel bookings have fallen since the start of the year with airlines forecast to lose $38bn in 2021 by global industry body Iata © Jeremy Suyker/Bloomberg

Texas-based American Airlines this month warned 13,000 of its employees are at risk of furlough, blaming new restrictions on international travel and slow vaccine distribution.

“We fully believed that we would be looking at a summer schedule where we’d fly all of our aeroplanes and need the full strength of our team,” chief executive Doug Parker said in a note to staff. “Regrettably, that is no longer the case.”

The measured language from the American Airlines chief sugarcoats the pain carriers have faced from having expectations repeatedly dashed during the pandemic.

Tony Douglas, chief executive of the Gulf carrier Etihad, said he had been hoping for a rebound in passenger numbers by the second half of the year, but “almost every time we revisit what’s going on it changes”.

For European airlines in particular, the prospect of mass vaccinations unleashing a surge in summer bookings was seen as key to repairing their balance sheets. “Summer is crucial, it is really critical” for European carriers, said Geoffrey Weston, a partner at consultancy Bain.

The region’s five biggest carriers — Ryanair, British Airways owner IAG, Lufthansa, Wizz Air and easyJet — have already raised about $20bn from a mix of governments, shareholders and bond markets to help them withstand the crisis.

Analysts at Bernstein reckon that in the event of the worst-case scenario with little flying over the summer, only Wizz is likely to avoid having to raise more money.

Line chart of Year-on-year % change in revenue passenger km showing Domestic flying has recovered more quickly than international

While the slow rollout of jabs in some countries has dimmed the chances of a firm rebound in international travel, the new enemy for airlines this year is more concerning: the spread of new Covid-19 variants that may be more resistant to the current stable of vaccines.

A small trial that found the Oxford/AstraZeneca vaccine may be less effective at stopping milder and moderate cases of the South African variant only added to the pressure on the UK government to introduce the tougher travel restrictions this week.

It also complicates any attempt to achieve international co-ordination on travel rules between governments, something airline executives have long believed is necessary for a resumption of air travel on any scale.

Line chart of MSCI World Airlines showing Airline shares have recovered some of their losses since vaccines emerged in November

Sweden and Denmark said they will offer digital coronavirus passports by the summer to help create international standards around certifying people as fit to travel. Beyond this, airlines have largely been left to develop their own solutions, working together to develop digital health passports that would provide certification of negative virus tests and vaccinations

But Wizz Air’s chief executive József Váradi acknowledges that “at this point in time, as an industry we do not own our own destiny, we are focused on political decisions.”

If governments are growing more focused on safeguarding their borders against new variants, shareholders have not given up on a rebound in passenger numbers this year. Airline stocks have largely preserved gains they made since November when many of the main vaccine developers revealed their jabs were effective.

And like other airline chiefs, Lundgren of easyJet has not given up hope.

“We have set ourselves up so we can take decisions as late as possible” on how many planes to fly over Easter and the early summer, he said.

When the recovery does arrive, the low-cost carriers may be best placed to capitalise as their short-haul businesses bounce back quicker than the long-haul that legacy European groups such as British Airways’ owner IAG and Air France-KLM rely on.

In the US, the big carriers all predict a slower recovery in long-haul international travel than domestic. Its large domestic market at least offers operators a cushion not available to European long-haul specialists.

For an industry whose lifeblood is open borders, 2021 has already provided a reminder that any restoration of that remains a long way off.

“There isn’t anybody who could smile inside and think ‘I am in a better place than the competitors’,” said Douglas of Etihad. “Realistically everybody is exposed.”


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