The International Air Transport Association’s (Iata’s) Airlines Financial Monitor December 2020-January 2020 has warned that airlines would face rising cost pressures as the global economy recovers from the Covid-19 pandemic. This was because of rising oil and jet fuel prices. Iata, which is the representative body for the global airline industry, pointed out that fuel is the largest variable cost for its members.
Oil and jet fuel prices have been strengthening since the second quarter of last year, and last month (February) they reached the levels that existed before the pandemic. Although near-term oil demand remained uncertain owing to renewed anti-Covid-19 lockdowns, extensions in oil production cuts by Organisation of Petroleum Exporting (and other) Countries, as well as the expectation of a global economic recovery, were supporting the rising prices. And few airlines took out hedging cover to protect themselves from fuel price rises this year, owing to the significant losses they suffered last year with their hedges when the fuel price collapsed under the impact of the pandemic.
“Looking forward, economic and oil demand will be highly dependent on the progress in (the) distribution of vaccines and subsequent easing of restrictions,” stated the Airlines Financial Monitor. “The recovery in air travel depends on similar factors. Hence, airlines would face pressure on the cost side once the recovery starts.”
The number one priority of airlines has been to cut costs. In the fourth quarter of last year, airlines in the Iata sample had, year-on-year, cut their employment costs by 39% and their maintenance costs by 54%. But while they had reduced their operating costs by 45%, their revenues had dropped by 67%. “2021 will also be a challenging year and airlines will look for cost cutting measures until the recovery starts with the opening up of international markets,” it noted.
In January, airline share prices fell again, following a rising trend during late last year. This fall was the result of reimposed travel restrictions, to try and contain new mutations of Covid-19. European airlines were the worst affected, owing to the slower-than-expected vaccination programmes on the continent. The North American and Asia-Pacific regions benefitted from having large domestic markets, which increased the chances of their performance improving more rapidly.
But global airline share prices in general continued to significantly underperform the global equity markets in general. Taking January 2014 as the base (=100), in dollar terms, on January 29 this year the share price index for the world’s airlines stood at 88.8 but the Financial Times Stock Exchange (FTSE) All World Index was at 164.2. In year-on-year terms, the world airlines index was down 29.5% but the FTSE All World was up 14.9%. In month-on-month terms, the airlines index was down 6% while the FTSE was down by a mere 0.5%.