European airlines: intra-Eur, N Atlantic to boost 2022 & reduce losses
According to IATA's Oct-2021 airline industry financial forecast, European airlines will benefit from the two fastest recovering international passenger markets in 2022.
Intra-Europe RPKs are forecast at 75% of 2019 volumes next year, with North Atlantic RPKs at 65% - both ahead of all other main international regions.
The intra-Europe recovery is good news especially for Europe's leading ultra-LCCs Wizz Air and Ryanair. The North Atlantic reopening to European travellers is positive for IAG, Lufthansa Group and Air France-KLM (in that order).
Nevertheless, costs have continued to run at higher percentages of 2019 levels than revenue has. Cutting capacity is easier than cutting cost - particularly labour - and losses are forecast for Europe's airline industry into 2022, albeit at narrower levels. Only the more domestic-focused North American airline industry is expected to return to profit in 2022 (North Atlantic reopening is an additional boost).
Among Europe's leading legacy groups, IAG does not have state-backed debt to repay, giving it more flexibility than Air France-KLM and Lufthansa Group.
Summary
- IATA forecasts global airline losses narrowing in 2021 and 2022. Only North America is forecast to be profitable in 2022.
- Europe's small domestic market held back its recovery, but it made progress in peak summer 2021. The North Atlantic reopening should help further.
- IATA forecasts RPKs at 65% of 2019 levels in 2022 on the North Atlantic and 75% on intra-Europe.
- Strong global cargo revenue is not enough to offset the loss of passenger revenue, which is still below 2019 levels.
- Cost has not fallen as far below 2019 levels as revenue has, partly because of fuel, but mainly due to non-fuel costs.
IATA forecasts global airline losses narrowing in 2021 and 2022
IATA's Oct-2021 update of the airline industry's economic outlook revised its forecast of the 2021 industry operating margin downwards.
In Apr-2021 it forecast an operating margin of -9.4% for the global airline industry, a very heavy margin of loss, but an improvement on 2020's shocking -28.2%.
In the Oct-2021 forecast IATA now expects a margin of -11.4%. Its revenue forecast has been increased, thanks to an improved outlook for cargo revenue (its passenger revenue forecast has actually come down slightly).
However, the increased revenue forecast is more than offset by a higher cost outlook (mainly due to higher forecast non-fuel unit costs).
Looking ahead to 2022, IATA expects the global operating loss margin to narrow to -2.7%. To put this in context, this would still be the third lowest margin (after 2020 and 2021) of the past 20 years.
Only North America is forecast to be profitable in 2022
In 2022 North America is expected to make a positive operating margin, at 4.8%, after making the narrowest loss margin in 2021 (-5.2%).
For Europe, IATA forecasts a negative operating margin for both years: -17% in 2021 (this is an improvement from its Apr-2021 forecast of -19% for 2021), and -5.9% in 2022. This is the second best regional margin forecast for 2022.
Airline operating margins by region: IATA forecasts
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Cargo is leading the recovery, followed by domestic, and then international, passengers
According to IATA's most recent traffic data, for Aug-2021, cargo traffic is above 2019 levels, while domestic passenger traffic almost reached 2019 levels in Jul-2021 (on a seasonally adjusted basis).
International passenger traffic has risen from the very lowest levels, but remains very weak.
For Aug-2021, CTKs were 7.7% above Aug-2019 volumes. Domestic RPKs were down by 32.2% from Aug-2019 levels, and international RPKs were down by 68.8%.
Passenger traffic and seasonally adjusted cargo traffic indices (Jan-2020 = 100), Jan-2019 to Jul-2021
Europe has suffered from having small domestic markets…
The faster recovery of domestic passenger traffic compared with international has favoured regions where domestic markets are significant.
For Europe, where domestic markets were only 24% of total seats in 2019 (versus 66% in Asia Pacific and 75% in North America), this has been an additional challenge.
…but has made progress since early summer 2021
However, the rollout of vaccination programmes and the greater facilitation of international travel - for example as enabled by the EU digital COVID-19 certificate - has helped Europe.
It has improved from last place in the regional ranking of capacity as a percentage of 2019 levels throughout the period Oct-2020 to Jun-2021 to fourth place now.
The reopening of the North Atlantic should help further
The planned lifting of the US ban on fully vaccinated European residents should further help Europe's recovery. The late Sep-2021 announcement that the travel ban would be lifted in Nov-2021 led to a strong surge in bookings made in Europe for North Atlantic travel.
Further clarity is still awaited regarding the precise timing of the rescission of the ban and details of which vaccinations will be recognised by the US. Nevertheless, the reciprocal reopening is positive for European airlines, for whom the North Atlantic is the most important intercontinental market.
See related report: European airlines hail long-awaited North Atlantic reopening
IATA forecasts RPKs at 65% of 2019 levels on the North Atlantic in 2022…
IATA now forecasts that North Atlantic RPKs will jump from 23% of 2019 levels in 2021 to 65% in 2022. This is the highest percentage of 2019 RPKs of any of the main intercontinental route regions forecast by IATA.
…and 75% on intra-Europe
RPKs within Europe are forecast even higher in 2022, at 75% of 2019 levels, while Europe-Asia is forecast at only 23%.
Asia is lagging the other major regions due to slower vaccination rollouts and ongoing higher levels of travel restrictions (international RPKs within Asia are forecast at just 11% of 2019 levels in 2022).
Main international routes: RPKs as a percentage of 2019 levels, 2020-2022F
Strong global cargo revenue is not enough to offset passenger revenue still below 2019 levels
IATA forecasts global airline cargo revenue to be 74% above its 2019 level in 2021, boosted both by strong traffic and yield. However, this is not enough to offset the passenger revenue forecast to be still 63% below its 2019 level.
Total airline revenue was 56% below 2019's in 2020. In 2021 it is forecast to be 44% below 2019, improving in 2022 to 22% below 2019.
Global airline revenue, USD billion, 2015-2022
Cost has not fallen as far below 2019 levels as revenue has…
Although IATA forecasts an improving top line each year, revenues are forecast to remain below 2019 levels in 2021 and 2022. The return of profitability is further delayed by costs forecast to be closer to their 2019 levels.
Total airline cost was 39% below 2019 in 2020. In 2021 it is forecast to be 34% below 2019, rising in 2022 to 15% below 2019.
…partly because of fuel…
Fuel prices are only one part of the cost challenge. IATA forecasts that the jet fuel price will rise from USD46.6/barrel in 2020 to USD74.5/barrel in 2021, and to USD77.8 in 2022.
However, this puts fuel costs at 19.0% of total costs in 2021 and 19.5% in 2022, still below the 21%-23% region they occupied in the years 2016 to 2019.
…but mainly due to non-fuel costs
The bigger challenge seems to be non-fuel costs. According to IATA, non-fuel cost per ATK rose by 19.4% year on year in 2020 - since expenses (in particular, labour) did not fall as much as capacity.
Non-fuel cost per ATK is forecast to fall in 2021, but by only 8.0%, before rising again by 2.0% in 2022. This means non-fuel cost per ATK is forecast at USc44.2 in 2022, compared with USc39.4 in 2019.
Forecast passenger yield growth does not offset higher non-fuel unit cost
IATA forecasts that global passenger yield will increase in both 2021 (by 2.0%) and 2022 (by 10.0%). This would take it a little above 2019 levels, but not high enough to offset the higher level of non-fuel unit cost.
Airline non-fuel unit cost and passenger yield (indexed to 100 in 2019), 2010-2020
Intra-Europe recovery good for European airlines…
For European airlines there are some encouraging elements in the IATA forecasts.
International RPKs within Europe are forecast to recover a higher percentage of their 2019 volume (75%) than any in other main international traffic region.
This is particularly good news for airlines focusing primarily on this market, which mainly means the leading European low cost operators.
…especially the ultra-LCCs Wizz Air and Ryanair
The ultra-LCCs Wizz Air and Ryanair are already leading the capacity and traffic recovery in Europe.
With significantly lower costs than LCCs such as easyJet or the LCC subsidiaries of the leading legacy groups, Wizz Air and Ryanair should also be better placed in a weak yield environment. Moreover, their more flexible cost bases are better suited to a market that is forecast to be still only 75% of pre-pandemic traffic volumes in 2022.
See related report: European aviation capacity: Wizzair and Ryanair lead recovery
EasyJet is a low cost airline but with a higher cost base than Ryanair and Wizz Air and has been more cautious in returning capacity, but is gaining confidence in the recovery. Its greater focus on primary airports allows it to use its cost advantage relative to the legacy airlines.
North Atlantic reopening good for IAG, Lufthansa Group and Air France-KLM
The recovery in the North Atlantic market is also encouraging for those European airlines that operate in this market, led by IAG, Lufthansa and Air France-KLM.
In 2019 IAG had 32.0% of its ASKs on the North Atlantic, followed by Lufthansa Group, with 27.7%, while Air France-KLM had 21.5% of ASKs in this route region.
See related report: European airlines hail long-awaited North Atlantic reopening
However, with 2022 Europe-North America RPKs forecast at only 65% of 2019 levels, the route region is unlikely to return to profitability in 2022.
IATA has not forecast the cabin mix of this 65%, but high yield premium cabins seem likely to reach a lower percentage of 2019 traffic levels.
Even if economy cabins reach a higher level and maintain good yields, revenue on the North Atlantic is unlikely to match the 65% achieved by RPK levels. Moreover, that is before taking account of new LCC entrants such as JetBlue, Norse Atlantic and PLAY.
With no state aid, IAG has more flexibility than Air France-KLM and Lufthansa Group
Air France-KLM and Lufthansa will have to be especially careful about their capacity re-expansion and which routes they bring back when, since they are seeking to repay state-backed debt.
IAG has a little more flexibility, in addition to a better history of profitability. Its acquisition of Air Europa, if it moves to completion, would give an additional boost in Madrid and in Spain-Latin America markets.