The need to take off in 2021
Air passenger transport is one of the mainstays of the tourism sector's value chain. For this reason, and in a similar way to the rest of the sector, it experienced a huge slump in 2020 in the wake of COVID-19. Airlines are currently having to tackle a combination of high capital costs due to their large structures and an almost total lack of operating income. The evident need for liquidity among Europe's airlines has led some governments to inject public capital to prevent their collapse. However, 2021 looks like being the watershed the tourism sector needs: the progress made by the vaccination roll-outs and the approval of measures such as the health passport will be crucial for air passenger transport to embark on the road to recovery and return to being one of the mainstays of tourism.
Spain's excellent performance in terms of its international tourism in recent years would not have been possible without the work of the airlines, which have managed to increase connectivity between destinations at highly competitive prices. So much so that tourist expenditure on passenger transport, with air travel making up the largest share by far, accounts for a sizeable 11.2% of all tourist expenditure, as can be seen in the chart. Given the importance of air travel for tourism, it is not surprising that, in the current crisis in the sector, airlines lie at the epicentre of the economic impact caused by the measures implemented to combat the spread of COVID-19 around the world.
% of tourist consumption
Tourist consumption by sector
Breakdown of consumption of transport
The current situation of airlines is devastating all over the world. By February 2021, 16% of all countries had closed their borders while 65% had imposed selective entry restrictions or quarantine measures on arrival.1 This, combined with the huge share repre-sented by international connections in the industry, has meant that, according to data from the Official Airline Guide (OAG), the number of scheduled flights worldwide in January 2021 was almost 50% lower than in January 2020. By region, we can see that EU countries and particularly the United Kingdom are the worst performers, with year-on-year falls in January of 66% and 83%, respectively. The US market, also hard hit by COVID-19, fell by 44% in January, still very high but much less than the decline recorded by European countries, thanks to the support offered by its domestic market. Countries such as Japan, Korea and Australia are in an intermediate situation. In their case, the volume of domestic flights has recovered relatively better but international flights have slumped significantly as these countries have controlled the spread of the pandemic by implementing very tough border restrictions. China is a case apart, with a very large domestic air transport market and where, thanks to its low COVID-19 infection rate, its air traffic has managed to recover almost entirely.
- 1. According to the Oxford COVID-19 Government Response Tracker border controls indica-tor: https://www.bsg.ox.ac.uk/research/research-projects/covid-19-government-response-tracker
in air passenger transport have been posted in the EU and UK.
Year-on-year change (%)
The decreases are extensive and very similar within the European market. According to data from EUROCONTROL, responsible for coordinating the continent's national air traffic control agencies, last January all Western European countries suffered year-on-year falls of between 55% and 80% in the volume of commercial flights. As can be seen in the chart, the five main European markets (Spain, Italy, Germany, France and the United Kingdom) recorded a volume of daily flights at the end of January that was very similar to the end of June. This is a remarkable development, since none of these countries had opened their borders before 15 June.
Volume of flights in Europe
Such poor figures have placed the airline industry in a highly complex financial situation. Airlines tend to be very capital-intensive, heavily structured companies with high costs that find it difficult to adjust in the short term. The airline market is also extremely competitive. For this reason, margins are small and airlines need to maintain a large customer base and high aircraft occupancy rates to make a profit. According to estimates by the International Air Transport Association (IATA), industry revenue declined by 66% by 2020 due to an 80% drop in passenger revenue and despite freight revenue growing by 17% year-on-year. On the other hand, operating costs (fuel consumption, logistics, maintenance and salaries) fell by 43% due to the decline in the number of operations and various furlough schemes implemented. Losses have been widespread, with the profit margin on global sales going from 11% in 2019 to -45% in 2020.2
- 2. The profit margin is the ratio of EBIT to total revenue. In 2020, the combination of losses (numerator) and a sharp fall in revenue (denominator) has resulted in very high negative ratios.
due to very low revenues and the difficulty of adjusting its high fixed costs.
Under such conditions, the industry has had to resort to extraordinary measures to increase its liquidity and raise capital. According to IATA data from the balance sheets of its nearly 290 member airlines, industry borrowing increased by 51.4% in 2020 via bond issues and bank and public sector loans.3 In terms of the part played by governments in supporting the sustainability of airlines, notable cases in Europe have been Air France-KLM, receiving €11 billion in credit and guaranteed loans from the French and Dutch governments at the end of April, and Lufthansa, receiving a capital injection of €9 billion from the German government in May 2020, increasing its stake in the company to 25%. In Spain we have also seen the bail-out of Globalia, the parent company of Air Europa, through two loans convertible into equity totalling 475 million euros, granted by SEPI at the end of October.
This situation has also been reflected in airline share prices. As the chart shows, the market capitalisation of Europe's major airlines declined by more than 50% between March and November, although share prices rallied slightly once a vaccine was announced. Only Ryanair has a higher capitalisation than on 1 January 2020.
- 3. IATA has not published information on the composition of the airline sample used, although it is presumably a representative sample. The airlines in the sample have increased their debt from 430 billion to 651 billion US dollars. Of this, 78 billion was raised by issuing bonds, 58 billion from public sector loans, 47 billion from commercial loans, 24 billion from public credit guarantees and 14 billion from deferred taxes.
Market capitalisation of the major European airlines
Change compared with 1 January 2020
Volume of flights at Spain's main airports
The case of Spain's airline industry is not unique. As in the rest of Europe, after the pandemic started in March 2020, passenger air travel came to an abrupt halt. According to data from the Ministry of Transport, Mobility and Urban Agenda, the volume of passengers at Spanish airports went from 274 million in 2019 to just 73 million in 2020 (–73% annually), dropping to levels similar to those in 1990. Moreover, the most recent figures show no improvement: in January 2021 the number of passengers in Spain fell by 85% year-on-year.
If we look at the trends for Spain's main airports, as shown in the chart, three conclusions can be drawn: (i) the slump in activity is widespread throughout Spain, (ii) those destinations preferred by domestic tourists have fared relatively better, and (iii) the Canary Islands have been more successful than the Balearic Islands in attracting domestic demand. Madrid, Spain's main airport thanks to its role as a hub between international and domestic flights, recorded a drop of more than 65% year-on-year in the second half of 2020. For their part the airports of Barcelona and Alicante, both located in very popular destinations for international tourism, have seen the sharpest decline in the last quarter of 2020. On the other hand, airports such as Seville and Bilbao, with a larger share of domestic flights, have also posted large decreases, albeit more moderate.
in 2019 to just 73 million in 2020 (–73%), dropping to levels similar to those in 1990.
- Given the numbers discussed in this article, the airline industry is currently looking very vulnerable. We believe a recovery in travel is vital in 2021 to bring recurrent income back to companies in the sector, thereby avoiding greater restructuring.
- However, such a recovery obviously depends on the effectiveness and speed of the vaccination roll-out. Achieving immunisation of around 90% of the population at risk in Europe and the approval of a health passport to enable vaccinated people to travel before the peak summer season will be key to turning the tide for the sector this summer.
- However, in spite of the expected improvement, the industry will still be under pressure. According to IATA forecasts, in 2021 airline revenue will remain at around 40% below pre-COVID levels and negative cash flows will continue until Q4.