Europe aviation: it's the economy, not COVID, weighing on the recovery
With Europe's seat capacity recovery continuing to plateau, there is at least the consolation that the COVID-19 pandemic is no longer the main factor holding it back.
Economic concerns have taken over, as illustrated in falling PMI data for both the Eurozone and the UK.
Europe's airlines face slower 2023 GDP growth than in other regions (according to the latest IMF forecasts), and the strength of the USD provides additional cost pressure.
Europe's seat capacity remains in the narrow range of 86%-87% of 2019 levels that it has occupied almost every week since late May-2022.
In the week of 17-Oct-2022 seat numbers are at 86.5%, which represents a shortfall of 13.5% against the equivalent week in 2019.
Summary
- Europe has 29.0 million seats this week - down 13% vs 33.6 million in the same week of 2019.
- Europe is fifth in the regional ranking on this measure.
- Europe's 1Q2022 capacity was at 74% of 2019 levels, 2Q2022 at 84% and 3Q2022 at 87%, which is the same level projected for 4Q2022.
- Economic concerns are growing in both the Eurozone and the UK, as seen in falling PMI data.
- According to the IMF, Europe's airlines face slower 2023 GDP growth than in other regions.
- USD strength is an added cost pressure for European airlines.
Europe has 29.0 million seats vs 33.6 million this week in 2019 - down 13%
In the week commencing 17-Oct-2022 total European seat capacity is scheduled to be 29.0 million, according to OAG schedules and CAPA seat configurations.
This is 13.5% below the 33.6 million seats of the equivalent week of 2019, which is a deterioration of 1.0ppts from last week's -12.5%.
With the exception of a single week in late Aug-2022, when this measure reached -11.4%, Europe's recovery has been broadly in the range of 13% to 14% below 2019 levels since late May-2022.
This week's total seat capacity for Europe is split between 6.9 million domestic seats, versus 7.7 million in the equivalent week of 2019; and 22.1 million international seats, versus 25.9 million.
Europe's domestic seats are down by 9.8% versus 2019, compared with last week's -6.6%.
International seat capacity is down by 14.5% versus 2019, compared with last week's -14.5%.
Europe: percentage change in weekly airline seat capacity vs equivalent week of 2019, weeks commencing 06-Jan-2020 to 17-Oct-2022
Europe remains fifth in the regional ranking by capacity as percentage of 2019's
This week (week commencing 17-Oct-2022), Europe stays in fifth place in the ranking of regions measured by seats as a percentage of 2019 levels.
With capacity down by 13.5%, Europe is 15.8ppts better than sixth placed Asia Pacific, where capacity is down by 29.2%, but 1.7ppts below the Middle East, where seat count is down by 11.8%. Capacity is down by 7.7% in North America, and by 5.6% in Africa.
Latin America is (just) above 2019 levels
Latin America's seat numbers are now 0.1% higher than in the equivalent week of 2019, making it the first region to rise above its pre-pandemic capacity.
Latin America and Africa have taken upward steps in the trend this week (week commencing 17-Oct-2022), whereas Asia Pacific, Europe and Middle East have taken downward steps.
North America is broadly level on the week of 10-Oct-2022.
Percentage change in passenger seat capacity vs 2019 by region, week of 30-Mar-2020 to week of 17-Oct-2022
Europe's 4Q2022 capacity is projected at 87% of 2019 levels (the same as 3Q2022)
According to data from OAG and CAPA, Europe's capacity as a percentage of 2019 levels improved with each successive quarter of 2021.
It was 27% in 1Q2021, 34% in 2Q2021, 64% in 3Q2021 and 71% in 4Q2021.
The improvement is continuing in 2022 so far. Capacity for 1Q2022 was 74% of 1Q2019 levels, 2Q2022 was at 84%, and 3Q2022 was at 87%. Looking at 4Q2022, the projection is 86.7%, only very slightly down from 86.9% last week and very close to the 3Q outturn.
Although there has been some volatility in projected 4Q2022 schedules, this is little changed from the figure of 87.1% projected for the quarter in late Jul-2022.
Economic concerns are growing, as seen in falling PMI data
As CAPA has noted in a number of recent reports, COVID-19 is no longer the main factor holding back Europe's capacity recovery from a full return to 2019 levels.
From the summer of 2022, there have been significant operational constraints and, increasingly, economic concerns.
A closely watched indicator of economic activity is the S&P Composite PMI (Purchasing Managers' Index) for different markets and regions.
In Sep-2022 the Eurozone Composite PMI fell to 48.1 - its lowest level since Jan-2021. This was the third successive month below the 50 mark, which indicates falling private sector business activity.
S&P Global Eurozone Composite PMI Output Index
Output fell across both manufacturing and services sectors as the Eurozone economy continued to be hit by high inflation, especially in the energy sector, and weaker demand created by growing economic uncertainty. Moreover, employment growth continued to slow down in Sep-2022.
The UK Composite PMI fell to 49.1 in Sep-2022, from 49.6 in Aug-2022, which was also the lowest since Jan-2021.
As with the Eurozone, both manufacturing and services suffered a reduction in activity.
Europe's airlines face slower 2023 GDP growth than in other regions
The International Monetary Fund's (IMF) Oct-2022 update of its World Economic Outlook expects the leading European economies to suffer the lowest economic growth among advanced economies in 2023.
The IMF forecasts real GDP growth for the Eurozone falling from 3.1% in 2022 to just 0.5% in 2023 (with negative growth in 2023 forecast for Germany and Italy).
For the UK, it forecasts growth dropping from 3.6% to 0.3%.
The IMF's 2023 forecasts for these markets are much lower than its forecast of 1.1% growth for all advanced economies (1.0% for the US) and 2.7% for the world economy.
Meanwhile, the IMF expects 4.9% growth in 2023 for emerging/developing Asia.
The airline industry has always been very economically sensitive, with GDP growth a key driver of demand and profitability. For Europe's airlines, the much weaker economic outlook into 2023 compared with other major world regions is a challenge.
The strength of the USD is an added cost pressure for European airlines
The challenge for European airlines is further compounded by the strength of the US dollar.
As at 19-Oct-2022, USD has gained 18.8% against EUR and 22.6% against GBP over the past 12 months (source: Google Finance).
USD/EUR and USD/GBP: percentage change since 20-Oct-2021
A significant proportion of an airline's operating costs is USD-denominated, including jet fuel and aircraft acquisition/financing costs.
For airlines whose revenue is mainly not in USD, costs in the US currency become more expensive when converted into their own currency. On top of generally high inflation and high fuel prices, this provides an additional upward cost pressure on Europe's airlines.
It may be little comfort for Europe's airlines, but a return to being an economically driven sector is preferable to being all but shut down by a global pandemic.