The European aviation industry’s post-pandemic demand recovery may already have peaked.
The end of severe travel restriction policies to control Covid-19 throughout Europe and the UK and the easing of summer airport capacity bottlenecks has supported recent demand recovery. Intra-European traffic flow reached 90% of 2019 levels at the end of September, according to Eurocontrol. These levels are now forecast to be sustained over the coming six weeks, which is a slight downward revision. By comparison, intercontinental demand remains 22% down on 2019 levels. The air traffic demand outlook may reflect a slow game of catch-up with the deterioration of the European and UK economies.
Attention has turned from the devastating impacts of the pandemic to how the cost of living squeeze, consumer spending and confidence trends are impacting aviation demand and the connected travel sector. The summer season was turbulent due to severe staff shortages across European airports, rising fuel costs and spiralling inflation. Jet fuel prices are 64% higher than September 2021, according to Eurocontrol. While demand currently suggests a tentative recovery, all may not be quite what it seems.
Inflationary pressures across mainland Europe and the UK remains fivefold ahead of central banks’ long-term targets. At the same time, there is a significant deterioration in business and consumer confidence. In both Europe and the UK, consumer confidence plummeted to all-time lows in September, according to the Economic Sentiment Indicator (ESI) and the GfK. In the UK, travel association ABTA said the government’s six-month Energy Bill Relief Scheme (EBRS) was “a welcome step”, lobbied for travel companies’ inclusion in the scheme and insisted the industry needs more support. Specifically, ABTA suggested business rates support beyond the end of the current financial year and increased headroom for the repayment of Covid-19 loans was required. Arguably, the worsening economic picture will translate into weaker air traffic demand over the next 12 to 24 months, as consumers tighten their belts with household budgets focused on rising energy, food and fuel prices as well as surging mortgage payments.
The operational challenges for airports and airlines due to staff shortages and strike action over the summer have eased, but are not resolved. Several major airports in the UK expect renewed resource pressure over the half-term school holidays in mid-October and possibly into winter. Some airlines and airports may again be forced into scaling down operations and schedules if passenger demand outstrips resources and if strike action by pilots, cabin crew and airport staff resume. Just this week, Virgin Atlantic announced it will permanently pull out of Hong Kong after 30 years, citing rising fuel prices and “complexities due to the ongoing Russian airspace closure” making the long-standing route unprofitable.
Amsterdam’s Schiphol Airport is another early example of this trend. Royal Schiphol Group, which operates Schiphol Airport, announced in mid-September that the maximum number of locally departing passengers would be reduced until the end of October. The decision was taken because the airport operator is unable to source sufficient security staff and follows the resignation of Schiphol Airport CEO Dick Benschop, as the airport continues to struggle with staff shortages.
The ability of airports and airlines to cope with demand peaks and avoid flight cancellations, baggage delays and long security queues, rests on their capacity to settle wage disputes with existing staff and recruit new employees. The latter involves long training periods, which must be factored into near-term resource capacity. The aviation labour shortage is particularly acute among younger workers, who left the industry during the pandemic and have not returned. The number of air transport workers across the European Union under the age of 40 was around 30% lower in Q1 2022, compared to the previous two years, according to data from Eurostat (the statistical office of the EU), reported by Bloomberg.
The data underscores the challenge facing airlines and airports to recruit new staff in security, cleaning and ground-handling roles which include unsociable hours, long commutes, and modest pay. Inevitably, higher wages will increase airport and airline operating costs, which will put further upward pressure on air travel prices at a time when discretionary spending and real incomes are falling. For these reasons, it is possible that the recovery in European air travel may have already peaked – for now – and there could be some pockets of sector distress to come in the months ahead.
The planned closure of Doncaster Sheffield Airport (DSA) is an example of the financial strain airports are under. Peel Group, the owner of DSA, announced on 26 September the airport would be winding down operations from 31 October due to a “fundamental lack of financial viability”. The statement continued: “The high fixed costs associated with running a safe, regulated airport, together with recent events materially reducing prospective future aviation income streams, mean that a break-even business plan cannot be identified for the foreseeable future.”
A global recovery in the aviation sector may not be realised until China and intra-Asia Pacific air travel fully reopens, which is unlikely in the near term. Annual losses for commercial airlines worldwide are forecast to reduce to $9.7 billion, which follows calendar year losses of more than $40 billion and $135 billion in the preceding two years respectively. The coming months will be yet another critical test for the struggling industry.
If your business, or portfolio company, is directly impacted by the challenges in the aviation sector and would like to discuss your strategic options, do get in touch with us and let us see how we can lighten the load.