While IATA struck a positive tone in trimming its loss forecast for the coming year this week at its AGM in Doha, the wider economic headwinds which are gaining strength mean downside risks far outweigh the potential for upsides.
Cutting its industry net-loss outlook for 2022 to single digits – a forecast loss of $9.7 bllion rather than the €11.6 billion it had projected last October – marked considerable progress on the past two years. Airlines are now thought to have collectively lost $42.1 billion in 2021 – around $10 billion less than first feared – and an eye-watering $137.7 billion in 2020.
”When we look at the pace of improvement, it is nothing short of spectacular,” says IATA chief economist Marie Owens Thomsen in a briefing outlining the results.
”The most damaging crisis in the aviation history, and in the space of three years we can perhaps, fingers crossed, be profitable. I think that’s an absolutely stunning performance, which attests to not only aviation’s resilience, but also the agility and creativity of people in this industry – exemplified by the performance of cargo in the past few years.”
Notably IATA is, at this stage, stopping short of firmly projecting a return to the black for 2023 for the industry as a whole. The association’s director general Willie Walsh, who struck a confident note throughout the AGM, said only that industry-wide profitability “should be on the horizon for 2023”.
The brighter prognosis is built on the sharp bounce-back in demand where restrictions have been lifted, which has seen collective load factors climbing back. “We are now quite close to breakeven [load factor] and this is why we dare to think that perhaps in 2023 the industry may be profitable,” says Owens Thomsen.
But she adds: ”Of course, there are many caveats.”
The risks are clear: China’s economic isolation as it continues its zero-Covid strategy, the consequences of Russia’s invasion of Ukraine, surging energy prices and inflation, and talk of recession. Many of them are inter-related, complicating the cause-and-effect impact for the industry.
On fuel costs, for example, IATA sees some small relenting in the oil price, albeit at high levels and with a higher-than-normal crack spread betwen jet fuel and crude oil prices.
”We think these [oil] prices will start to decline going into the end of this year and continue to decline in 2023, but only gradually and marginally, leaving the absolute level still high in relative terms,” says Owens Thomsen.
But she adds: ”We are not unaware that these could go in a different direction. So for instance, today I have to admit in our forecast we are assuming that China will have gradually removed travel restrictions as of early next year. Since [our forecast], there has been news that might happen at a much more gradual pace into the middle of next year and possibly longer.
”So the longer time that China is sort of insulated from the global economy, the lower the oil demand will be. That is something that argues for a lower oil price.
”But that in turn brings other risks in its wake, because China has been the economy’s most formidable growth engine. So the longer China is insulated from the global economy, the more the odds are stacked against our GDP forecast. We don’t know yet what Q2 GDP was in China yet, but we are expecting a very low number, and if that was repeated for another year, a year and a half, we would have a situation where oil prices are coming down, but also so might GDP growth,” she explains.
Further uncertainty springs from how the conflict in the Ukraine unfolds. “Not knowing what is going to happen in a war situation, I feel that the appropriate strategy to adopt is one of middle ground,” Owens Thomsen says. ”So we are assuming this war will carry on for the rest of this year, but certainly not spread. The result is a reasonably benign assumption about this war. If we are wrong on those assumptions, that maybe paints a very radically different picture.”
Inflation also continues to rise. ”Clearly inflation has exceeded expectations. So that is definitely a concern. But I persist in thinking we are still witnessing something quite transitory, even if that is longer than we initially thought,” she says.
Thus far high inflation has not impacted travel demand, but ultimately it is likely to bite. “This year we are just literally witnessing people don’t seem to care – that the travel deficit is so great… that people are willing to pay a higher price. That will wane, we can all assume.
“The other thing is we are also buffered by the high savings households accumulated in the crisis,” she adds. ”At some stage their savings won’t be available and that will start gripping in 2023 at some point.”
She says the silver lining though is relatively low unemployment levels. “As long as people are still earning, I am not so concerned in the absolute about the higher rates of inflation,” she says.
“Where we would fit into a much more negative global scenario would be if we start to see unemployment rates rising – and that again depends a lot on what happens in China.”
Owens Thomsen also flags factors such as the impact of higher insurance costs for airlines resulting from Russia’s invasion of Ukraine, which remains a potentially huge issue for the industry.
“So there are things we really don’t know how they are going to pan out, we refrained from baking it into the forecast,” she says. ”All these things combine to making us feel that the risks to our forecast are quite predominantly skewed to the downside.”