CAPA Outlook: How can we expect a sustainable industry built on junk bonds?


The global aviation industry, savaged by the effects of Covid-19, today resembles a hopeless drunk, lurching towards the next crisis. This is the raw assessment of the present reality according to CAPA Founder and Executive Chairman, Peter Harbison, in his upcoming monthly outlook presentation in the Apr-2021 edition of CAPA Live.

"Even the US airline majors - who operate inside a protected domestic market that has delivered higher profits than the rest of the world combined in recent years up to 2019 - have been bailed out three times and most have gone through Chapter 11 reincarnation since 2000", said Mr Harbison.

"This is clearly not a financially viable industry, yet with government support airlines are about to re-embark into an environment that is much more hostile than the ones which preceded COVID-19. Things need to change, even just to remain the same", he said.

The Apr-2021 edition of CAPA Live carries the theme "Airlines in Transition" and examines the evolution of airline business models and the factors, including technology, that are driving change. CAPA Live's audience has now reached 6,000 industry professionals from 200 countries. Of these, over 1,500 airline delegates from over 210 airlines are now registered, making CAPA Live the largest aviation and travel industry event in the world right now. Registration is free here.

  • The global aviation industry is facing significant financial challenges, even with government support.
  • Airlines have taken on massive amounts of debt, making profitability elusive and cash-raising difficult.
  • Leisure traffic and VFR (Visiting Friends and Relatives) will dominate travel profiles, leading to lower average yields for airlines.
  • Reopening national borders will be slow and uncertain, with vaccination rates and infection rates playing a role.
  • While there may be an initial surge in demand, average booking levels will remain below 2019 levels throughout 2021.
  • Climate change reform pressures and demands for reduced emissions will further constrain the industry's growth and profitability.

The five key market ingredients for 2021 - all headwinds

In his upcoming CAPA Live presentation on 14-Apr-2021, the CAPA founder will highlight the five main ingredients in the outlook for international aviation:

1. The debt mountain

Airlines have taken on vast amounts of new debt, fueling massive repayment costs. Profitability will be highly elusive near-term, making further cash-raising more difficult. According to the A4A, US airlines have coped with the Covid crisis "in part by taking on billions in debt". The airline body says net interest expense doubled from 2019 to 2020 and estimates it will exceed USD16 billion in 2021-2023.

US airline debt and interest expense (USD bill): 2018 to 2023F

2. The yield valley

Leisure traffic and VFR - low yielding segments for airlines - will dominate travel profiles for the remainder of 2021 and beyond. Fewer business travellers - the key to long haul full-service operations - will take to the skies, as businesses reassess plans and look to shave costs.

So average yields are likely to crash by 30% or more this year. And even if yields do eventually climb, can airlines survive another year at these levels? In this environment, low costs (ie LCCs) are king.

3. The COVID closed doors

Reopening national barriers will be tortuous and uncertain. Very few countries will be vaccinated to the extent to provide herd immunity, and therefore reluctant to expose residents to fresh waves of infection. Similarly travellers will be wary of countries with high infection rates, even if they are permitted to enter.

Vaccine passports may help, but standardisation and mutual recognition are enormously important. But multilateral consensus on access principles is a long way off, so most reopening will be achieved bilaterally - and slowly.

4. The Demand drought

While "pent-up demand" will provide an initial surge in (mainly leisure/VFR) demand, average booking levels will remain well below 2019 levels throughout 2021. This implies a combination of lower fares to stimulate traffic and excess capacity in the market, meaning airlines with high costs will struggle to compete in a sustainable way.

5. The heavy weather

Add to this, the 'heavy weather' of climate change reform pressures, which will suppress demand and constrain expansion. Expect 'flight shaming' to make a return as demands intensify from governments and consumers for aviation to reduce emissions. The Triple Bottom Line - "profit, people, and the planet" - will constrain business travel, just as corporations have adapted well to the 'post-travel economy' dominated by effective virtual meetings.

Factors limiting international revenue growth: 2021

The outlook: more red ink and an industry weakened and vulnerable

For almost all airlines, 2021 will continue to be marked by cash burn and losses. Recovery will not begin seriously before 2H2021, firstly in domestic markets and aided there by vaccinations. A much smaller market pie and much smaller full-service airline industry, perhaps up to 50% smaller, will be the outcome.

For the rest of Peter Harbison's 2021 predictions on government support, capital raisings, cargo, the supply chain and more, be sure to watch his outlook at 00.00 GMT during the CAPA Live April edition. Registration is free here.

Other Apr-2021 speakers at CAPA Live include Qantas Airways Group CEO, Alan Joyce, SriLankan CEO, Vipula Gunatilleka, British Airways' CEO, Sean Doyle, Eurowings' Chairman & CEO, Jens Bischof; JetBlue Board Director and former Spirit CEO, Ben Baldanza and JetSMART Founder & CEO, Estuardo Ortiz, among many others:

CAPA Live Apr-2021 Speaker Highlights

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