A Turbulent Rebound Marks For An Eerie Full Recovery For The Aviation Industry

Airlines around the world are facing an uneven and turbulent recovery from the COVID-19 health crisis, as global travel surges, yet labor shortages, higher costs, soaring inflation, and a looming recession restricts many from making a full recovery more than two years after temporarily grounding flights and slashing jobs. 

While the majority of the world is grappling with severe economic uncertainty, as higher interest rates and inflation eats into consumers’ disposable income, major airline groups might only see full recovery by as early as 2024. 

A study by Airports Council International World (ACI), suggests that airlines will experience pre-pandemic levels by late next year.  Previously estimated that there would be more than 9.8 billion passengers in 2021, but the outbreak of the pandemic resulted in a loss of more than 52.9% or 5.2 billion passengers.

The summer travel chaos experienced across most of the northern hemisphere only added more blows to the recovering industry as severe staff shortages continued to plague full recovery.

Yet, despite these persistent and ongoing challenges, coupled with geopolitical tension and economic headwinds, the International Air Transport Association IATA) recently suggested that air traffic is now at 73.7% of pre-COVID levels, showing continued recovery momentum. 

During Q1 and most of Q2 of 2022, passenger volume was up to 1.3 billion and 1.7 billion, respectively. This represented 62% and 75% of reported 2019 levels. 

Even as the industry shows continuous growth due to a surge in consumer demand, macroeconomic challenges will only hinder full recovery. On the back of this, airlines are already seeing geopolitical tension between Russia and Ukraine affecting their operations, as many have cut flights and transfers between the nations since the invasion started back in February this year. 

Headwinds and Turbulence Ahead 

Aside from the obvious tight labor conditions, several airlines have been working to improve their recruitment and training process in efforts to lock in more personnel before the holiday travel season starts. 

Countries that managed to control the outbreak of the COVID-19 pandemic may have seen little to no impact on their domestic economy in terms of job security and social welfare. However, in some parts of the world, the pandemic only drove unemployment figures up and left greater economic uncertainty for millions. 

In the United States, employment has stabilized, as numbers from the Bureau of Transportation Statistics show total headcount for passenger and cargo airline employees combined decreased between June and July 2022, yet totals are still 3.3% higher than the same period in 2019. 

Perhaps the biggest concern for the majority of airline operators right now is dealing with a  surge in operating costs and the heavy price of fuel which has been eating into their recovery profits. 

Reports suggest that since the start of the year, the price of jet fuel has increased by roughly 90%, which has led to airlines paying 120% more on average than what they did in 2021. Fuel expenses account for 25% of total costs for most carriers, depending on the year. 

Some airlines found that for every cent a gallon of jet fuel increases in price, the total fuel bill would go up by around $40 million. 

Typically, airlines pass 60% of volatile fuel costs onto consumers, and while in the past carriers were able to introduce this evenly spread, in recent months, many jumped to pass costs more rapidly in response to higher passenger demand and changing consumer behavior coming out of the pandemic. 

In April this year, analysts suggested that airfares had already increased by more than 40% since the start of 2022. 

The cost of traveling, not just domestically, but for international long-haul flights between America and Europe and other secluded destinations, are becoming increasingly pricey. 

On the back of this, the aviation industry is also experiencing increasing pressure from the government to adopt and improve its environmental and sustainability policies. A study published in Nature Climate Change estimates that the tourism industry contributed around 11% of total greenhouse emissions in 2019. 

While the aviation industry does stress the fact that it holds a smaller carbon footprint compared to other industries, such as oil and textiles, legislation has been an ongoing battle to see more carriers adopt greener policies and invest more resources into developing greener initiatives. 

Hoping to increase its approval ratings among environmentally conscious consumers, American Airlines (NASDAQ: AAL) recently conceded a deal with biofuel engineering company Gevo. The partnership would see America purchasing 500 million gallons of sustainable airline biofuel (SAF) in the coming five years. 

Delta Air Lines (NYSE: DAL) is another major U.S. carrier that recently signed a deal with Louisiana-based DG Fuels to use its green hydrogen-produced fuels in its fleet. Though it hopes to deliver more promising results and growing deliveries in the near future, the current global SAF supply would be able to operate a fleet Delta’s size for one day. 

Carriers around the world are facing a slew of environmental challenges as consumers, and private investors are becoming increasingly carbon conscious, choosing to associate with companies that highly value environmental protection efforts. 

Although it’s a good sign that the aviation industry is looking to move more towards sustainable transportation practices, the transition would come with a price tag many airlines aren’t able to afford as they are still managing their road toward recovery. 

While there are cost-effective possibilities, growing research and development for biofuels could still take years before widespread adoption. This would leave major airline carriers to look for more cost-effective models to implement while ensuring the expansion of their top-line performance. 

The grim forecast could make it increasingly hard for the industry to see a full recovery in the coming months, perhaps not even as easily as in 2023. 

A Bloomberg Intelligence report found that the average profit expectations for U.S. airlines have come down by as much as 85% since the start of the year. Analysts further predict that overall profit performance heading in 2023 could already be down by 35%.

The gloomy forecast puts investors in a hawkish position over whether airline stocks are worth their consideration and investment, even as the industry has revealed a resilient rebound throughout much of the year. 

Going forward, investors will hold a long-term position on airline stocks rather than hoping for near-term returns amid tumultuous performance conditions. 

Approaching A Soft Landing 

While there’s a slim chance for the industry to experience a soft landing in the coming months or perhaps years, ongoing macroeconomic conditions, which have been deteriorating at a rapid pace, are making a full recovery for the aviation industry increasingly difficult. 

Even as carriers look to pass inflationary costs and skyrocketing fuel prices onto consumers, which have held strong for most of the travel season this year, it’s not to say that these conditions will continue into the next year as experts suggest a looming recession could be around the corner. 

Costly barriers, labor shortages, and supply chain bottlenecks are not looking to disappear anytime soon, and airlines will be pinned against the wall in coming months, leaving many to make hard financial decisions that can impact their top-line performance. In hopes of a potential soft landing, consumer behavior and investor sentiment will be guidance for the road forward.