Airlines cannot cut costs enough to stave off bankruptcies and keep jobs in 2021, according to the newest analysis of the International Air Transport Association (IATA).
As a result, airlines would be forced to cut their labor force by 40 per cent.
Unless governments act fast, some 1.3 million airline jobs are at risk.
And 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.
While IATA is not advocating specific workforce reductions, maintaining last year’s level of labor productivity (ASKs/employee), would require employment to be cut by nearly half.
Airlines have to lay off more workers or cut their pay to bring unit labour costs down to the lowest point of recent years, a 52 per cent reduction from 2020 third quarter levels.
Even if airlines slash labor costs drastically, total costs will still be higher than revenues in 2021, and airlines will continue to burn through cash.
“There’s little good news on the cost front in 2021. Even if we maximize our cost cutting, we still won’t have a financially sustainable industry in 2021,” Alexandre de Juniac, IATA’s Director General and CEO warned.
Once more, IATA revised its 2021 industry revenue projection down further to 46 per cent versus the 2019 figure of $838 billion.
Peviously , they projected 2021 revenues to be down 29 per cent compared to 2019, based on expectations that demand will recover by fourth quarter, 2020.
However, new COVID-19 outbreaks and government travel restrictions including border closings and quarantine measures are delaying recovery.
IATA expects full year 2020 traffic to be down 66% compared to 2019, with December demand down 68%.
“The fourth quarter of 2020 will be extremely difficult and there’s little indication the first half of 2021 will be significantly better, so long as borders remain closed and arrival quarantines remain in place,” warned Alexandre de Juniac, IATA’s Director General and CEO.
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,” he underscored.
Although airlines have taken drastic steps to reduce costs, around 50% of airlines’ costs are fixed or semi-fixed, at least in the short-term.
As a result, costs have not fallen as fast as revenues.
In response to the collapse in travel demand, unit costs (cost per ASK, or CASK) have risen, since there are fewer seat kilometers to ‘spread’ costs over.
Preliminary results for the third quarter show that unit costs rose around 40% compared to the year-ago period.
To breakeven and neutralize cash burn in 2021, costs need to fall by 30% versus average CASK for 2020.
Such a decline is without precedent.
With international demand down nearly 90%, airlines have parked thousands of mostly long-haul aircraft and shifted their operations to short haul flying where possible.
But because the average distance flown has fallen sharply, more aircraft are required to operate the network.
Thus, flown capacity (ASKs) is down 62% compared to January 2019, but the in-service fleet is down just 21%.
Around 60% of the world aircraft fleet is leased. While airlines have received some reductions from lessors, aircraft rental costs have dropped less than 10% over the past year.
It is critical that airports and air navigation service providers avoid cost increases to fill gaps in budgets that are dependent on pre-crisis traffic levels.
Infrastructure costs have fallen sharply because of fewer flights and passengers.
Infrastructure providers could cut costs, defer capital expenditures, borrow on capital markets to cover losses or seek government financial relief.
Fuel is the only bright spot with prices down 42% on 2019.
Unfortunately, they are expected to rise next year as increased economic activity raises energy demand.
“The handwriting is on the wall,” according to de Juniac. “For each day that the crisis continues, the potential for job losses and economic devastation grows. “
“Governments must step forward with additional financial relief measures. And they must use systematic COVID-19 testing to safely re-open borders without quarantine.”