Woes Continue for Airline Industry

Few sectors have struggled as much as the airline industry during the Covid-19 pandemic.

2020 was brutal for airline companies, and we all have reasons to believe 2021 will not be much better at least not in the first half of the year.

The Revenue Passenger Kilometers, or RPK — a figure that the airline industry uses to track the total number of kilometers traveled by paying passengers — is estimated to decline by 66% this year, which would be the largest decline since the Second World War, according to IATA (International Air Transport Association).

In 2021, the availability of a vaccine in the 2nd half of the year is anticipated to be a turning point but the recovery will be gradual since phased distribution of vaccine will take time. Global RPKs are forecast to improve by 50% in 2021 following the steep decline in 2020”, says the industry association, representing about 290 airlines or 82% of the global air traffic.

The passenger volume has been recovering since its bottom, in mid-April, but slowly. 

In the U.S., according to the TSA (Transportation Security Administration), it’s less than half from a year ago. On December 27, the busiest day since the pandemic hit the country, in March, 1.2 million people traveled through American airports, compared with 2.6 million on the same day last year.

American Airlines expects Covid-19 will keep pressuring the demand in 2021.

The carrier president, Robert Isom, said the company and this scenario probably wouldn’t change in January and February, despite the kickoff of the Covid-vaccination.

United doesn’t see a much brighter scenario either for the first months of 2021.

In a letter to its employees, on December 21, United CEO Scott Kirby and President Brett Hart said they “see the light at the end of the tunnel,” but “we just don’t see anything in the data that shows a huge difference in bookings over the next few months.”

Some are much more pessimistic. Microsoft co-founder Bill Gates said recently he believes the coronavirus changed the way people travel and companies conduct business for good, and, as a consequence, “over 50% of business travel and over 30% of days in the office will go away.”

Financial Help

The airline industry has received federal aid to go through this tough time, but companies have adopted personnel costs reductions. For instance, over 32,000 workers have been furloughed since March.

According to Airlines for America, a trade group representing large U.S. carriers, the industry supports some 10 million jobs, including more than six million jobs in tourism and hospitality.

U.S. Airlines received $25 billion in government assistance from the CARES Act approved in March. As a counterpart, one of the requirements was keeping employees on payroll until September 30.

After this deadline, with the demand still down, the companies started to incentive early retirement and voluntary leave, implement furloughs, and lay off employees.

The industry got an additional $15 billion in funding in the new coronavirus relief package approved in December. 

Along with the current requirements, workers furloughed from October 1 will be recalled and given back pay from December 1. 

And if the airline didn’t join the March stimulus but now wants to apply for funds, it`ll have to recall workers who were furloughed since March 27. Airlines also cannot furlough workers or cut pay and benefits until March 31, 2021.

Plus, airlines accepting the aid will not be allowed to make any dividend payments. Executive compensation and stock buybacks are limited.

Stocks Diving

In normal conditions, airline stocks are already tricky. It’s a volatile market with low margins.

According to IATA, North American airline industry profits are forecast to be down nearly $46 billion in 2020. Assuming a national vaccine distribution by the second half of the year, profits for 2021 are predicted to be down by $11 billion.

The stocks from the major U.S. carriers suffered a big hit, as expected. American Airlines lost 44% so far this year, Delta dropped 30%, and United dove 50%.

SouthWest is best positioned among its peers. It had lost 14% year-to-date, less than half than most of its rivals. On the other hand, it offers probably less upside.

It’s important to remember that airline stocks are always kind of tricky, mainly due to the industry’s volatile nature and low margins. 

And it’s expected that companies will keep offering, at least in the short term, significantly discount ticket prices to stimulate demand, IATA reported based on surveys of airline chief financial officers.

They will also have to keep cutting costs, like retiring older and less fuel-efficient planes.