Demand For Air Travel To Spur Economic Growth In 2022

Two years into the crisis, a crucial moment has passed for many: boarding the first plane in a post-pandemic world. After reuniting with family, friends, colleagues, and clients the passion for flight is reignited. As the cycle turns, opportunities in aviation are ripe for the bold. Expect air travel to rise again in 2022, writes WOLE SHADARE

Way out

Despite its sharpness, the recession of 2020 was one of the shortest on record as economies roared back in 2021 with nearly six percent GDP growth.

Governments and central banks have pumped $26 trillion into the financial system over the past two years, more than the annual Gross Domestic Product (GDP) of the United States, the United Kingdom, and India combined.

Supply chain disruptions have led to inflation and interest rate hikes will follow, just as the pandemic bill is coming due. Nevertheless, strong economic growth is expected to continue in 2022, driving demand for air travel when passengers are freed to do so. A year ago, vaccines had just been approved for emergency use and therapeutics were largely still in trials.

Medical progress underpins aviation recovery

 

Today, over nine billion COVID vaccines have been administered, six times as many flu shots as are produced annually. Despite entering 2022 with omicron-induced restrictions, inoculations and effective treatments limit the lethality of each new wave of the virus as it transitions from pandemic to endemic.

Medical progress underpins aviation’s recovery enabling governments and passengers to regain the confidence required to travel again.

Globally, domestic air travel roared back in 2021 to within 12 percent of 2019-levels, but international recovery continues to lag by over 60 percent. North America and Latin America lead the recovery with around 80 percent of airline capacity flying again, while the Asia Pacific trails at less than half.

Europe’s digital certificate provided a framework to reopen borders in time for peak summer. The trans-Atlantic reopening in the fourth quarter led to an immediate bump in passenger bookings. Singapore’s vaccinated travel lanes lead Asia’s reopening, providing a pathway for others to follow.

The recovery in tourist-focused economies such as Thailand, Mexico, and Greece demonstrated that government intent is key to aviation’s revival.

Travel experts seek coordinated policies

Travel experts stated that coordinated government policies remain critical to air travel recovery, adding that a COVID-resilient mindset must rise above COVID-free.

To them, blanket travel bans do not prevent spread and quarantines for the asymptomatic vaccinated are an unnecessary burden, just as testing, they noted, keeps travelers with symptoms away from airplanes, but constantly changing policies must be avoided to prevent confusion and needless turmoil.

Continued gradual recovery is expected in 2022, varied region-by-region. Each wave of infections results in a smaller impact on air travel demand.

As immunity increases, isolation periods are shrinking and cross-border testing requirements are being reduced despite omicron’s impact on case numbers.

The Americas and Europe are poised to rebound once omicron subsides. Border restrictions, rather than vaccine supply, will constrain Asia Pacific’s recovery with a China reopening unlocking 40 percent of international traffic in the region. Just as domestic traffic bounced back in 2021, international flows will reawaken in 2022.

Market access, others hamper Africa’s growth

For Africa, cooperation in Africa’s air travel could create at least 155,000 jobs and $1.3 billion more in economic growth. It could also stop the situation where travelling to Europe is cheaper than travelling around the continent.

The first step to recovery is to free up the physical airspace above countries. That space and the aviation industry is governed by the Chicago Convention. This recognises the sovereignty of states to the airspace above their territory. They are mandated to provide air navigation infrastructure to guide flights in that airspace.

In return, they can charge modest fees to recover their costs, like toll stations in the sky. Many countries consider aviation as a cash cow and milk it for what it is worth. In West Africa, countries work together and manage their airspace as one. Europe does the same. Other African countries should follow suit. This avoids duplication of equipment and costs, resulting in lower over-flight fees and hence lower operational costs for airlines and cheaper tickets.

The second step concerns access to markets. Africa has a structural weakness where there is poor travel between countries and reliance on overseas airlines.

During the phase of COVID-19 lockdowns, this meant many Africans were marooned in other countries. With fewer flights, offering little intra-African travel, the airline industry has not reached its potential. This means inadequate airport infrastructure and a skill gap for both technical and management expertise.
African carriers’ lingering problem

All these are symptoms of a more malignant malaise. South African Airways had re-started operations after a hiatus of 17th months triggered by bankruptcy protection. Kenya Airways is heading back to nationalisation after privatisation that was initially hailed as a great success. Doing the same thing repeatedly does not lead to different outcomes.

The market is there. Africa has 16 percent of the world’s population but accounts for less than four percent of the aviation service market.

Cash-starved airlines have developed creative financing structures realising they have more collateral than initially thought.

Over $28 billion of publicly traded debt is now secured by routes, slots, gates, and loyalty programs. Active balance sheet management and refinancing of expensive debt stacks will be the priority in 2022.

Continued shareholder and government support will be critical to airlines that have not yet benefited from revenue recovery.

Competitive dynamics have been reshuffled. While only fifteen or so airlines failed in 2021, the airline providing the most capacity has changed in a quarter of countries. More than 25 percent of airlines operating in the fourth quarter of 2021 flew more capacity than they did in 2019.

The first two years of the pandemic were marked by the mergers that did not happen (e.g. Air Canada and Air Transat, IAG, and Air Europa) and the start-ups that got off the ground (e.g. Breeze, SuperAir, Starlux). With clarity building on who are the winners and losers, expect to see airline consolidation pick-up in 2023

Cautious optimism

Caution is still required. The market needs time to heal as evidenced by continued high levels of stored aircraft. Aircraft that are built must be gainfully employed for decades to generate a return for owners. While new aircraft reduces fuel consumption compared to the aircraft they replace, they emit two years’ worth of carbon savings in their production.

The carbon case for early retirements is contentious. Too much production too soon risks recovery of the aftermarket, impacting engine manufacturers, suppliers, and lessors whose business requires aircraft to fly, not just deliver.

Domestic recovery is driving a tightening supply-demand dynamic for single-aisle aircraft. Airbus is leveraging strong product offerings against the limited competition in both the small and large single-aisle segments to take a commanding market share lead. Monopolies don’t last.

Airbus’ A321neo offers uncontested payload range capability, but lacks cargo capacity and is not common to the fleets of the over 200 airlines that only operate Boeing.

While not a trans-Atlantic route opener, Boeing’s 737 MAX 10 performs perfectly well trans-continentally with 40 more seats and 300nm more range than the highly successful 737-800. United Airlines, GOL, and Lion Air are eagerly anticipating the MAX 10’s lower unit operating costs. Others will follow in 2022.

Last line

The year 2020 was plagued by voluntary leave, furloughs, and layoffs as airlines, manufacturers, and suppliers were forced to cut costs. A talent shortage has emerged. Recalls and new recruits will be common in 2022 but pilots, flight attendants, and mechanics require training while incumbent manufacturers are competing with new upstarts in an engineering talent war. Supply chain limitations, delays re-activating stored aircraft, and maintenance slot capacity will further challenge a return to full capacity.

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