Aviation had a tough 2020 - and next year remains uncertain

The swift reaction by governments in Europe and further afield to the emergence of a new Covid-19 strain in Britain highlighted once again the uncertainty the aviation industry faces in 2021. Shortly after British health secretary Matt Hancock admitted that the more infectious variant of the virus was "out of control", countries, including the Republic, barred flights from the UK.

The move was all the more disheartening because it followed several weeks of good news about vaccines, which had prompted air travel to begin looking ahead rather than just grappling with the nine-month pandemic crisis. Aer Lingus began selling its 2021 summer schedule in the autumn and, in December, Ryanair confirmed it would take an option to buy 75 more Boeing 737 Max jets from the US manufacturer, bringing its full order to 210.

DAA, the State company responsible for Cork and Dublin airports, announced plans to discount charges to airlines next year, once they brought in certain numbers of passengers. It also pledged to return workers to full pay on March 28th, assuming there were signs that the recovery had begun.

Confirmation of the new strain’s existence brought more uncertainty at the end of a year where the only certainty was collapsing passenger numbers in the face of the pandemic and governments’ efforts to contain it.

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Airport traffic

The number of people passing through the Republic’s airports fell more than 80 per cent in 2020. The biggest, Dublin, had 23.5 million fewer passengers in the 11 months to the end of November than during the same period in 2019.

There is still debate about how long a recovery will take

Ryanair said in November it expected to carry 38 million passengers in its current financial year, which ends on March 31st, 2021. Before Covid, the carrier had expected to fly around 150 million people.

The Republic relies heavily on air travel. The industry is responsible for around 140,000 jobs here, and it is the main route into the State for tourists and investors as well as the main route out for businesses selling their goods and services abroad. Tough restrictions introduced by Government in summer, when airlines began flying again following a three-month grounding, drew heavy fire from carriers, airports and other players.

A key question now is when does the industry start climbing out of this trough? Enda Corneille, Ireland country manager with Gulf carrier, Emirates, warns it will take time.

“I still remain cautious about the next year,” he says. “I think it will be the end of the year before we see the beginnings of a return to normality.”

Corneille argues that the key is the world's main markets opening up again. Stephen Furlong, aviation analyst with Dublin stockbrokers, Davy, agrees. "Airlines' customers haven't disappeared," he says. "They're kind of waiting in the wings for governments to allow them fly."

Next summer will be an important step on the road to recovery, Furlong believes. The first indicators of its likely strength will come in January, February and March, when people begin to book flights for the following summer. Short-haul and holiday business are likely to recover first with long-haul following.

Furlong warns that, while corporate travel will eventually recover to 2019 levels, this could take years. Initially, he calculates, it could be down at least 20 per cent. “That means they won’t take one journey in five,” he says, adding that video-links, whose popularity grew on the back of pandemic restrictions, could be substituted for some in-person meetings.

Covid-19 struck in the spring as airlines were taking summer bookings, forcing them to return that cash to customers while at the same time ensuring they took a hit on fuel hedges, designed to save them money. Since then they have been working hard to preserve their cash, but plenty ran into difficulties.

Protection from creditors

In the Republic, Cityjet sought court protection from creditors earlier this year to restructure. Norwegian Air Shuttle is now going through the same process in the High Court. The Oslo-based carrier chose to do this in the Republic as it holds its 140 aircraft through companies based here. The airline is likely to emerge as a shadow of its former self, with a much reduced fleet.

Sustained restrictions such as those introduced amid the new Covid strain could set the industry back further

Big legacy carriers, including Air France KLM and Lufthansa, have borrowed a lot of money, much of it from their governments, to stay afloat. Lufthansa's entire package was worth around €9 billion. Others are in better shape, International Airlines Group, owner of Aer Lingus, British Airways and Iberia, has €7.7 billion in cash. Ryanair has €4.5 billion.

Furlong points out that Ryanair is one of just four airlines on the planet with investment grade ratings, which imply that borrowers regard them as a good risk. The others are Easyjet, Wizz Air, both European, and Southwest Airlines in the US. Better capitalised carriers are most likely to survive.

In fact, Joe Gill of Goodbody Stockbrokers suggests they will emerge stronger. He notes that Ryanair and Wizz Air shares gained considerable ground before Christmas, as investors believe companies such as these will have a greater share of the post-Covid air travel market.

Vaccines

There is still debate about how long a recovery will take. The reality is that vaccines, their effectiveness and the speed at which people get them will influence this heavily.

News that EU regulators had approved Pfizer’s product and that the first batches would be delivered before the end of December will have settled some nerves. However, most forecasts indicate that it will be summer before most people have been inoculated. Corneille believes predictions that it could be 2023 or 2024 are probably correct. This leaves the industry with a long way to go.

One of the consequences of that is a surplus of aircraft, which is going to hit lessors, companies that buy planes and rent them to airlines. Many of the leading companies in this business, including Aercap, Avolon and SMBC Aviation Capital, are based in the Republic, and are themselves responsible for about 5,000 jobs.

Lessors borrow much of the cash they use to buy aircraft. While the leading players are well capitalised, and the likes of Aercap and Avolon have been taking advantage of low interest rates by swapping existing liabilities for cheaper debt, Gill notes that the sector as a whole faces a dual problem: falling revenues from airlines and falling asset values.

There is a lot at stake for them, for airlines, for airports and for the hundreds of thousands of jobs dependent in some way on aviation. Sustained severe restrictions such as those introduced in the wake of the new Covid strain’s emergence could set the industry back further, even as it edges closer to the start of a recovery.