Cargo revenues buoy airlines amid $84b loss for 2020

Cargo pallets on the tarmac and the tail of Swiss Air Lines with white cross on it

Airlines stand to lose more than $84 billion this year, driven by a 50% reduction in revenues, but without the boom in cargo business the industry’s predicament would be even worse, the International Air Transport Association (IATA) said Tuesday in an unprecedented description of the financial tsunami crashing over the industry due to the coronavirus pandemic.

Cargo typically is a small portion of the overall industry, especially for passenger-focused airlines, but not this year. Cargo revenues will reach a near-record $110.8 billion in 2020, up from $102.4 billion last year, IATA estimated, fueled by supply shortages that have sent transport rates several times higher than those of typical shipping peaks associated with end-of-year holidays. The cargo share of total industry revenues will jump to about 26% this year — up from 12% in 2019.

Travel restrictions and public fears over contracting COVID-19 led to the mass shutdown of passenger operations and a global recession. The associated belly space of those planes represents more than 50% of total global airfreight capacity. All-cargo carriers have pulled some planes out of storage and passenger airlines quickly transitioned many planes for use by cargo customers, but it hasn’t been enough to meet the  acute demand for air shipping of COVID-related medical supplies, industrial goods and food.

Overall freight tonnage is expected to drop 16.8%, or 10.3 million tons, to 51 million tons. But the severe capacity shortfall is expected to push up airfreight rates by about 30% for the year, IATA said. 

Next year, cargo revenues will increase 25% to a record $138 billion, representing about 23% of total industry revenues — double its historical share, IATA predicted. Air cargo demand is expected to be strong as businesses restock for the economic upturn, while the gradual return of the passenger fleet will limit the growth of cargo capacity, and keep cargo yields steady at 2020 levels.

Airlines are on track to burn $61 billion in cash during the second quarter because of the collapse in passenger revenues, including issuing ticket refunds, and unavoidable overhead costs. 

The trade association forecast that the industry profit margin will fall 20.1%, with revenues halved to $419 billion from 2019. The shortfall in expected revenue is $104 billion more than its previous estimate in mid-April. Revenues are expected to improve to $598 billion next year as airlines add capacity to meet renewed travel demand, cutting the industry’s loss to $15.8 billion with a net profit margin of -2.6%.

The $100 billion loss over two years is more than three times the haircut airlines experienced during the global recession in 2008-09.

“Financially, 2020 will go down as the worst year in the history of aviation. On average, every day of this year will add $230 million to industry losses,” IATA Director General Alexandre de Juniac said in a statement. “It means that — based on an estimate of 2.2 billion passengers this year — airlines will lose $37.54 per passenger. That’s why government financial relief was and remains crucial as airlines burn through cash.” 

On Tuesday, Cathay Pacific announced a HK$39 billion ($5 billion) recapitalization plan that includes a HK$7.8 billion bridge loan from the Hong Kong government. A day earlier, Austrian Airlines agreed to a 600 million euro ($678 million) rescue package that includes 150 million euros in state aid. And Lufthansa Airlines last week reported a 1.2 billion euro operating loss in the first quarter and accepted a bailout from the German government. Swiss International Air Lines also took a loss and received government loan guarantees.

“Provided there is not a second and more damaging wave of COVID-19, the worst of the collapse in traffic is likely behind us,” de Juniac said. At the low point in April, passenger traffic was about 95% below 2019 levels. IATA predicts air travel measured in revenue passenger kilometers will be down 54.7% for the full year and that actual passenger numbers will be halved to 2.25 billion, equivalent to 2006 levels.

Tentative Recovery

Airlines are beginning to add flights in June and July as bookings tick up, but industry officials say a full-blown recovery will take years and will depend on implementing hygiene and social distancing measures to give customers, and governments, assurance that air travel is safe.

IATA projects passenger revenues will drop 60% to $241 billion — greater than the fall in demand — reflecting an expected 18% drop in passenger yields as airlines slash prices to attract customers again. Load factors are expected to average 62.7% for 2020, about 20 points below the record high of 82.5% achieved last year.

Carriers have taken drastic steps — voluntary and involuntary furloughs, early retirement of aircraft, salary reductions, postponement of projects, and termination of contractors — to reduce discretionary and capital expenditures, but it hasn’t been enough to overcome lost revenue. IATA said industry expenses are 35% less than a year ago. That represents a savings of $517 billion but compares to a 50% drop in revenue. 

Making money in the coming months will be difficult as fixed costs are spread over fewer passengers, especially as some airlines continue to block off middle seats and cap cabins at about two-thirds occupancy to help with social distancing. Aircraft utilization rates will also be lower to allow time for deep cleaning and increased cabin inspections.

Fuel and Aircraft

Meanwhile, fuel prices are rising from the market bottom in March. Still, the forecast average for the year is $36.8 per barrel versus $77 in 2019. Airlines will save $78 billion in fuel costs because of operating fewer flights and lower prices, with jet fuel expected to account for 15% of overall costs compared to 23.7% last year, IATA said. Next year, the price of jet fuel is expected to average $51.8 per barrel, similar to what it was in 2016.

Commercial airlines currently have 960 new aircraft scheduled for delivery, about 40% lower than the number originally planned at the beginning of this year as carriers cancel or postpone orders. Only 235 new aircraft had been delivered through the end of May, well below usual levels, IATA said. With balance sheet damaged and fuel prices low, many carriers are opting to hold onto older aircraft they previously planned to replace. Still, many planes are being permanently retired because airlines expect to operate smaller fleets for the foreseeable future. 

The global fleet is expected to decrease 32% to 20,261 aircraft this year and the average size of aircraft will also decline as airlines focus on short and medium-haul travel initially, the IATA report said. By the end of 2020, the trade group estimates that there will be 2.8 million available seats, more than one-third fewer than in 2019. 

The trade association’s outlook shows passenger traffic rebounding to 3.38 billion passengers next year, about the same number who flew in 2014. Revenues will improve 42% to $598 billion but will be 29% below the $838 billion generated last year. Analysts expect travel to gradually increase, starting with domestic flights, then graduating to regional and international destinations. The extent to which people are willing to travel is an open question still, with many staying home until COVID is contained, or there is a vaccine, and others in poor financial shape after losing jobs or taking pay cuts because of lockdowns that halted business activity.

“Airlines will still be financially fragile in 2021. Passenger revenues will be more than one-third smaller than in 2019. And airlines are expected to lose about $5 for every passenger carried,” de Juniac said. “Competition among airlines will no doubt be even more intense. That will translate into strong incentives for travelers to take to the skies again. The challenge for 2022 will be turning reduced losses of 2021 into the profits that airlines will need to pay off their debts from this terrible crisis.” 

Industry debt levels were relatively low ($430 billion, or about half annual revenue) entering the year, but airlines have borrowed $120 billion from the public and private sectors in the span of four months to ensure adequate cash flow to stay in business. With cumulative debt of $550 billion — and growing — debt-to-revenue ratio is now 92%, according to IATA. It urged governments to focus further relief on helping airlines generate more working capital and stimulating demand, rather than providing loans.

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