Assessing the unpredictable factors that could delay airport business recovery

The scale of air passenger traffic recovery hinges greatly on the “known unknowns” facing the COVID-19 hit world, according to Airports International Council (ACI) World Vice President Economics Patrick Lucas. He was speaking last week at a Duty Free World Council seminar on Wednesday titled 2021 – The Year of Recovery?.

ACI forecasts a recovery to 2019 passenger levels by the end of 2023 or into 2024, but Lucas warned that this target could stretch into 2025 for the key European and North American markets.

The global airports association also predicts that air traffic should rebound to over 50% of 2019 levels by the end of 2021, up to a maximum of 65% in its most optimistic scenario.

ACI economics expert Patrick Lucas said that forecasts on the speed of air traffic recovery inevitably involve “some degree of randomness” in the current circumstances

All of the above, as Lucas noted, is dependent on the continuing spread and containment of the coronavirus pandemic, the imposition of travel restrictions by world governments and the speed of COVID-19 vaccine roll-outs over the course of 2021.

As a result, Lucas declared that making forecasts for air traffic recovery have “some degree of randomness making it a challenge for predictions”.

He pointed to solid international guidance material and recommendations from an array of international organisations to aid air traffic recovery, including ACI and the International Air Transport Association (IATA), working together. But, he noted, “governments continue to react and act unilaterally for the most part”.

“Reinvigorating the sector by building up passenger confidence has become paramount”

– ACI World Vice President Economics Patrick Lucas

Lucas said recovery for the sector requires governments to introduce a consistent testing process to promote travel. He said: “We need to move away from restrictive quarantine measures with a coordinated and risk-based approach, which combines both testing and vaccinations as the way forward.”

Outlook for passenger traffic and recovery

Scenario forecasting: Known unknowns

Source: ACI World

Addressing the question of whether 2021 could see a meaningful recovery in air passenger traffic, Lucas said he expects a notable improvement on 2020, and that “the darkest days are behind us”, with the steepest traffic declines having already been witnessed.

Lucas reported that global air passenger traffic was down by -63% across 2020, with an estimated six billion passengers removed from the projected baseline set down before the start of the year. According to ACI figures, this translated into estimated losses of US$112 billion in the airport industry.

Global airport traffic: A tale of two markets (domestic and international)

Source: ACI *Estimate

Putting that figure into perspective, he calculated that this translates to the world’s 85 busiest air travel hubs having their revenues wiped out for the year.

He also highlighted the knock-on financial effects to the wider travel business – including hotels, restaurants and retail – noting that 57% of global tourists would arrive by air in a typical year. Lucas said this translates into a US$1.8 trillion drop in GDP for 2020 which would usually be supported by aviation, adding: “This is due to a slow recovery impacting the catalytic benefits of aviation-supported tourism, but also a reduction in investment by airports, airlines and other parts of the sector.”

Looking at employment factors, Lucas also warned that, according to ACI’s calculations, 4.8 million direct aviation-related jobs could be lost once government wage support schemes conclude. Of all the sectors within this ecosystem, the largest decline – up to -55% – will be felt by those working on airport sites including duty free, retail, car rental, airport administration and other services, Lucas observed.

Economics of airports amidst the pandemic

Collapse in revenues with high fixed costs

Source: ACI World, Airport Economics Survey n=~900

Looking ahead to the prospects of recovery for 2021, Lucas said the main ingredients to support air travel demand will relate to consumer confidence, namely the “fear factor” to travel, vaccine roll-outs and the alleviation of travel restrictions. “Reinvigorating the sector by building up passenger confidence has become paramount,” he said, noting that as of 31 January only Israel had achieved a high vaccine penetration rate.

Continuing on the vaccine theme, he added: “Another quasi known unknown is related to the vaccine divide between those who want to take it versus those who are reluctant to take it. And there is a rising divide that also exists between advanced economies versus developing economies in terms of who gets into the queue first, for the vaccines. All of these factors contribute to the timing and velocity of the industry recovery.”

On the subject of consumer confidence, Lucas cited an Autumn 2020 ACI survey of 4,100 travellers across the world, who had travelled by air in 2019. More than three quarters of respondents (76%) mentioned that they will not travel if they need to quarantine. This proportion becomes significantly higher among vacation travellers, at 85%.

Global economic loss from COVID 19

Pre- COVID versus post-COVID GDP contribution

Source: ATAG

Addressing supply side factors, he said the airline industry has “literally physically shrunk”. He said that large airlines which have retired four-engine passenger wide-body aircraft such as Airbus A348/A380 and Boeing 747 will not replace them in many cases, given the current state of the market. A combination of this, and other, supply side factors, Lucas noted, will contribute to a predicted decline of -38% in scheduled seat capacity for the first quarter of 2021 (OAG figures).

On a more positive note, Lucas said that domestic air travel – down by -46% in December 2020 – is showing some positive signs with the major markets of China and Russia “just about” recovered. Other big domestic markets such as the US, India, Japan, Mexico and Thailand, he noted, are also now accelerating their recoveries.

International passenger traffic (down -86% in December 2020), however, will recover much more slowly, Lucas predicted. He added: “Tighter international restrictions have recently been put in place in some major markets, so we will see the biggest uptick as a result of pent up demand on the vaccine rollout in H2.”

Global job loss from COVID 19

Pre -COVID versus post-COVID jobs supported by aviation

Source: ATAG

Looking at the overall picture, Lucas said that ACI expects traffic levels – “guided by the strength of some major domestic markets” – to be somewhere above 50% of 2019 levels this year, up to a maximum of 65% in the most optimistic scenario, as noted above.

Considering the longer-term air traffic recovery picture, and assuming that the bulk of vaccines will be rolled out in 2021, traffic is expected to get back to 2019 levels by the end of 2023 according to ACI’s predictions. However, negative factors relating to COVID-19 (such as new variants) and the timing of vaccine roll-outs could push that recovery well into 2024, Lucas said, and in the case of the more mature air passenger markets of Europe and the US, even into 2025.

Considering the traffic picture even further ahead, Lucas stated that he believes the long-term fundamentals of air travel market growth remain, with 80% of the world’s population residing in emerging markets and developing economies.

Shrinking supply… Shrinking market

Capacity reductions

Source: IATA

Lucas concluded: “I want to remind us all that, despite the crisis, despite the human atrocity that has come with this, we’ve also seen the introduction of different opportunities to innovate, bringing the passenger centre stage and we are going forward with a potentially unified or consolidated business model based on technological solutions.”