International Air Transport Association warns of devastation for airlines as outlook worsens

The outlook for airlines in the early part of 2021 is even worse than this year. Photo / AP

Airlines can't slash costs fast enough to cover severe cash burn to avoid bankruptcies and preserve jobs next year, says an industry body.

Total industry revenues in 2021 are expected to be down 46 per cent compared to the 2019 figure of US$838 billion (NZ$1.2 trillion), the International Air Transport Association says.

This is a far more grim outlook than earlier in the year when it was calculated revenue would be down around 29 per cent compared to last year.

This was based on expectations for a demand recovery in the fourth quarter of this year but a resurgence of Covid-19 in second and third waves around the world has put the brakes on air travel.

The association expects full year 2020 traffic to be down 66 per cent compared to last year.

It has reiterated its call for government relief measures to sustain airlines financially and avoid ''massive'' layoffs. It has also called for pre-flight Covid-19 testing to open borders and enable travel without quarantine.

The fourth quarter of the year ''will be extremely difficult'' and there is little indication the first half of next year will be significantly better, so long as borders remain closed and/or arrival quarantines remain in place, says Alexandre de Juniac, the association's director general and chief executive.

''Without additional government financial relief, the median airline has just 8.5 months of cash remaining at current burn rates. And we can't cut costs fast enough to catch up with shrunken revenues."

Air New Zealand - which has been rocked by Covid-19 - last month said it had about $1 billion of liquidity, made up of $215 million of cash on hand and $790 million remaining on the $900m government loan facility. The airline told shareholders it would burn through $65 million to $85 million of cash a month under current conditions.

IATA says although airlines had taken drastic steps to reduce costs, around 50 per cent of them were fixed or semi-fixed.

''The result is that costs have not fallen as fast as revenues,'' said de Juniac.

Year-on-year decline in operating costs for the second quarter was 48 per cent compared with a 73 per cent decline in operating revenues, based on a sample of 76 airlines.

Airlines have cut capacity (available seat kilometres, or ASKs) in response to the collapse in travel demand, meaning unit costs (cost per available seat kilometre CASK) have risen, since there are fewer seat kilometre to spread costs over.

Preliminary results for the third quarter show that unit costs rose around 40 per cent compared to the year ago period.

Looking forward to 2021, the association estimates that to achieve a break-even operating result and neutralise cash burn, unit costs will need to fall by an unprecedented 30 per cent compared to average Cask for this year.

Thousands of aircraft are parked up as demand for travel has plunged. Photo / AP

Factors contributing to this include:

With international demand down nearly 90 per cent, airlines have parked thousands of mostly long-haul aircraft and shifted their operations to short haul flying where possible.

However, because the average distance flown has fallen sharply, more aircraft are required to operate the network.

This has meant flown capacity is down 62 per cent compared to January 2019, but the in-service fleet is down just 21 per cent.

Around 60 per cent of the world aircraft fleet is leased. While airlines have received some reductions from lessors, aircraft rental costs have dropped less than 10 per cent during the past year.

He said fuel was the only bright spot with prices down 42 per cent on last year but they are expected to rise next year as increased economic activity raises energy demand.

While IATA says it is not advocating specific workforce reductions, maintaining last year's level of labour productivity (ASKs per employee) would require the workforce to be cut 40 per cent.

Even if that unprecedented reduction in labour costs were to be achieved, total costs will still be higher than revenues in 2021, and airlines will continue to burn through cash.

"There is little good news on the cost front in 2021. Even if we maximise our cost cutting, we still won't have a financially sustainable industry in 2021," he said.

"The handwriting is on the wall. For each day that the crisis continues, the potential for job losses and economic devastation grows.''

Unless governments acted quickly, some 1.3 million airline jobs were at risk. That would have a domino effect putting 3.5 million additional jobs in the aviation sector in jeopardy along with a total of 46 million people in the broader economy whose jobs are supported by aviation, IATA calculations show.

''Governments must take firm action to avert this impending economic and labour catastrophe. They must step forward with additional financial relief measures,'' said de Juniac.

In this country, more than 4500 airline jobs have been lost since the start of the year. In the United States unions are fighting for another $40 billion to prevent a wave of tens of thousands of layoffs.