Market outlook: A slow down in market recovery

During the month of August, domestic markets dominated the recovery. However, the recovery in air passenger services was brought to a halt in mid-August by a return of government restrictions in the face of new COVID-19 outbreaks in a number of key markets. While Passenger volumes rose from the low point in April, improvement has been slow. Industry-wide revenue passenger-kilometers (RPKs) fell by 75.3% year-on-year compared with 79.5% annual contraction in July. Seasonally adjusted passenger volumes also moved higher for another month but are far from the pre-COVID levels. Industry-wide available seat-kilometers (ASKs) recovered faster than RPKs, resulting in the global passenger load factor reached all-time low for August, at 58.5%.

Domestic markets outperform international routes

All regions reported smaller annual declines, with Asia Pacific posting the best outcome for another month (-69.2% yoy). European carriers demonstrated the fastest recovery (-73% yoy in August vs. –81.2% yoy in July), due largely to the robust performance on Russia domestic routes and signs of rising demand in the smaller intra-European market. In fact, domestic Russia was the first key domestic market where passenger volumes returned to expansion (+3.8% yoy) this year. Falling fares along with a boom in domestic tourism were among the main contributors to the positive swing.

In China, domestic RPKs contracted by 19.1% year- on-year – up 9.3 ppts vs. July. And in Brazil, demand continues to gradually recover in the domestic market where its RPKs fell by 67.0% year-on- year in August, up from -77.7% in July. In the US, a new wave of COVID-19 infections slowed the domestic market recovery with domestic passenger volumes declining by 69.3% year-on-year. In Japan and Australia, regarding RPK outcomes, the year- on-year contraction rose slightly, to -68.6% and -91.5% YOY. New spikes in COVID-19 cases also slowed recoveries in Vietnam, South Korea and Japan. In August, the aggregated domestic RPKs contracted by 50.9% year-on-year vs. 56.9% annual fall in July, which is a slower rise than in the previous two months.

International Markets Holding Back Recovery

While domestic routes showed positive developments in August, international routes lagged. International RPKs were still almost 88.3% lower compared with the same period a year ago even with restrictions on cross-border travel relaxed in many countries. One notable exception was the Europe international market which posted a year-on-year contraction easing by 7.1ppts, to -79.9%. This positive performance is attributed to the increasing demand on intra-European routes where a majority of restrictions were lifted in mid-June. Apart from the intra-European routes, international demand was weak.

Load factors still below breakeven

Industry-wide available seat-kilometers (ASKs) fell by 63.8% YOY, up 6 ppts vs. July. While more seats have been made available, the demand to fill seats still remains low. Industry-wide passenger load factor (PLF) was at a record low for another month at 58.5%. As seen in July, the passenger load factor on domestic routes was on average higher than in international markets (64.2% vs. 48.7%). This points to passengers continuing to prefer traveling on domestic routes as developments in international travel are uncertain.

Mixed Market Drivers

GDP results from Q2 confirmed the severe impact of the pandemic with the World economy contracting by ~9% year-on-year in the second quarter. This is approximately three times faster fall than in the ‘worst’ quarter of the Global Financial Crisis. At the same time, however, leading indicators of business activity show that economic activity has been recovering since late Q2 as lockdowns eased and businesses resumed. Compared with a year ago, retail sales have increased in some of the key air travel markets including the US, Euro Area and China, which is viewed as a positive indicator. While business confidence is showing signs of recovery, job losses continue to impact consumers. Over the near term, consumers will be cautious about their personal finances, including their spending on air travel.

Low Willingness to Fly

Adding to the challenges the industry currently faces is a low willingness to fly on behalf of consumers. According to the latest IATA’s passenger survey, willingness to fly remains low with more than half of the respondents plans to travel no sooner than in six months. The risk of compulsory quarantine at destination is a key deterrent. To that point, 83% of the respondents indicated that they will not travel if there is chance of quarantine after arrival.

Air travel forecast downgraded for rest of this year

According to IATA Economics using data from DDS, booking data point to a weak fourth quarter for 2020. Air travel forecast has been downgraded for the rest of the year, with full-year 2020 traffic to be down 66% compared to 2019. The previous estimate was for a 63% decline.

This pessimistic recovery outlook is based on a number of recent trends. To begin, there is little sign of virus containment in many important emerging economies. Together with the US, this represents almost 40% of global air travel markets. Secondly, corporate travel budgets are expected to be tightly constrained as companies continue to be under financial pressure even as the economy improves. And finally, consumer confidence is weak in the face of concerns over job security and rising unemployment, as well as risks of catching COVID-19.

Unless governments move quickly and decisively to find alternatives to border closures as well as stop-start re-openings and quarantines, there is little chance there will be an increase in international air travel, which in normal times accounts for nearly two-thirds of global air travel.

Source: IATA Air Passenger Monthly Analysis – August 2020