How airlines are risking big with the resurgent pandemic

The resurgent pandemic across the globe is not good news for Airlines as much as the grounded airplanes.

The slow tickle of passenger traffic is killing the industry. Companies like AirAsia in Malaysia is feeling the pinch.

A report from Euler Hermes shows the rising Covid-19 infections is hold back the recovery of passenger demand.

The second half were to be better with signs of recovery in some countries in the first half. But a resurgent COVID-19 is dealing a blow to new plane deliveries, especially wide-bodied jets.

On the other hand, the lowered production rates put aerospace players’ profitability at risk.

CONTRACTION

Global air traffic measured by Revenue Passenger Kilometers (RPKs) contracted by -75% year-on-year in August.

This is mostly the result of the short summer season in Europe and rising infections in North America.

There is also the continued low willingness to fly that adds to the woes of the airline industry.

“As sanitary restrictions tighten again, we now expect full-year 2020 air traffic to be down 60% – vs. a 40% decline in our previous forecast – compared to 2019 and to recover to its pre-crisis level only in 2024.”

The challenges facing airlines have been passed onto the upstream global aircraft industry by the deferral of new plane deliveries.

“Along with a slump in new orders, if not outright cancellations, depending on the type of aircraft. Breaking down the data, we find that the Covid-19 crisis has hit demand for wide-body (twin-aisle) aircraft more than narrow-body (single-aisle) ones since long-haul international travel has suffered the most.

Airbus and Boeing will probably see a drop in new plane deliveries by –
57% and -26% in 2020 and 2021, respectively, compared to 2019.

In this context, aircraft manufacturers have no choice but to slow
down their production-rates to around 40 aircrafts a month.

This is well below their target of 60 a month a year ago.

PROFITABILITY RISK

Lowered production rates put aerospace players’ profitability at risk. Plane makers were to post a USD4bn operating loss in 2020.

The average aircraft manufacturers’ operating margin rate are to plunge into the red at -2.5%. This is after an all-time high of 9% only two years ago.

This gloomy outlook stems from Airbus and Boeing’s (most) profitable wide-bodies facing the highest production rate cuts.

However, aircraft part and engine suppliers should get away with an operating margin rate divided by three to around 3% in 2020 and 2021.

In the long-run, European aircraft manufacturers and suppliers are
heading for a harder time.

U.S. players can count on large and unchanged defense budgets but not European players. They will not only have to wait for the production rates of new planes to bounce back but also cope with losses of capacities.

This takes into account ambitious plans for a zero-emissions hydrogen-powered plane by 2035.

It is simply too ambitious a challenge!