IATA Chief Economist Marie Owens Thomsen shares the latest forecast data and insights on where the global airline industry is headed through 2023.
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Rush transcript
Karen Walker:
Hello everyone, and thank you for joining us for Window Seat Aviation Week Air Transport Podcast. I'm Air Transport World and Group Air Transport editor-in-chief, Karen Walker. Welcome on board. This week I'm delighted to be in Geneva, Switzerland and sitting in the headquarters of the International Air Transport Association. IAT represents some 300 of the world's airlines, and its mission is to represent, lead and serve the airline industry. For more than 70 years it has developed global commercial standards on which the entire air transport industry is built. So, this week IATA is holding its annual global media days where its executives brief us on key industry issues, and of course at the top of that briefing yesterday was IATA's forecast for where it expects airlines to be financially. So, therefore I am absolutely delighted to be joined today by the IATA chief economist, Marie Owens Thompson. Marie, thank you so much for joining us today. Marie led the team here at IATA that put together this forecast report and I'm thrilled to say that she's going to share some of those insights with me now. So, Marie, let's start with some of the top line figures that you gave for where you expect the airlines to be financially by the end of this year, and then like I say, even more important where things are going in '23.
Marie Owens Thomsen:
Already this year we are seeing an improvement from our June forecast, so now we think that the losses that the industry will post for 2022 will be just shy of $7 billion, and we are close enough obviously to the zero line to be able to project a profit of $4.7 billion for the industry in 2023. Now, this is on the one hand an absolutely stunning and phenomenal performance because the loss that the industry experienced in 2020 was completely unprecedented, never seen before, I don't know what words to use to impress upon everybody how absolutely exceptional that was, and it was not far off 140 billion loss. So, that we managed to recover within the space of four years, given the magnitude of what happened in 2020 is really quite extraordinary.
Karen Walker:
Absolutely. We heard Willie Walsh, the director general here at IATA talk about his optimism from what we are seeing in those numbers, it's not an even performance across the world regions. So, an interesting thing is that the North American carriers for example are leading the pack by quite a long way and are expected to report a net profit collectively, this here in '22 will be the only ones to do that this year. What's different about the American market, the North American market?
Marie Owens Thomsen:
Well, I think the recovery has completely been driven by travel restrictions or the absence thereof, that has sort of replaced all the standard macroeconomic models that we otherwise use for predicting traffic volumes. So, in a sense developments are a bit divorced then from the macroeconomic evolution, which is after all not super great. We're going from 6% growth in 2021 to barely 3% this year, and maybe barely 2% to next year. So, it's interesting to see how that has not influenced traffic flows because it's all about can we travel or can we not travel? So, the US was obviously favored by having a reasonably open attitude to these travel restrictions and understood quite early that this was not really going to move the spread or delay the spread of the pandemic in any meaningful way. So, that science-based approach to restrictions I think was very favorable for the North American market, and of course also the fact that you have a very large domestic market which was also therefore less impacted by any of these international travel restrictions. So, we can see other countries too that have benefited from a similar approach, Mexico for instance has also done really well in a situation where they did not impose very many restrictions, if any.
Karen Walker:
Yeah, exactly. I live in Washington DC, so what I've also seen within the US is that as you've just pointed out, obviously the big thing is the domestic travel there because people could fly, there weren't the restrictions after a while. And then as soon as people could fly to places like Mexico and the Caribbean, they've been doing that in a big way. The North American market you're projecting will make a I think almost $10 billion profit collectively in '22, probably growing that to about 11 and a half billion next year. And then I think it's the other two regions that you're anticipating also becoming profitable as a collective next year, that's Europe and the Middle East, correct?
Marie Owens Thomsen:
Yes, absolutely. The environment is clearly challenging in Europe given that we have war in Ukraine, so that is obviously not particularly helpful to our industry or to the world economy for that matter. Yeah, it has to be said that the most growth promoting policy that we can put into place anywhere is peace. So, what looks today perhaps as a miracle if the war could end soon, but if it could end it would obviously help us greatly both globally and for our industry in that energy prices could come down, food prices could come down, the US dollar appreciation could be somewhat thwarted and all of those things would clearly help both the global economy and our industry. That and then the China situation, whether China will open up or seize imposing so many lockdowns. Both of those will of course have a very big impact on the world as a whole, but perhaps that particularly on Europe and the Middle East in this context.
Karen Walker:
You mentioned Ukraine there and of course tragically the war still continues there. It seems to me from the conversation yesterday in the briefing that the direct financial impact on this industry is not so much on the operations and the flight, it's more to do with the effect that war is having on oil prices, which of course have risen substantially. Is that the big thing at the moment?
Marie Owens Thomsen:
Yes, exactly. But even if the countries bordering on Ukraine do not represent a very high percentage of the total global air traffic, their connectivity is extremely important of course to them. So, they now have a lack of air connectivity. They do not have a rail system that is as developed as Western Europe's rail system, and arguably the same could be said to some degree regarding road transportation and so on. So, we calculated at some point that an increase of 10% in connectivity in Europe could bring about a long term gain in GDP in Europe of a percentage point. So, if we are looking at economies that are sort of tethering on the brink of recession and we think about what kind of impact this lack of connectivity is going to have, that's obviously quite dramatic.
Karen Walker:
And then you just mentioned China there, so the Asia, if we just take another quick look at the regional snapshots, Asia Pacific and of course this is an area that's critical for aviation growth and has been incredibly successful at that, it's lagging way behind certainly North America, but in fact it's actually the furthest behind. I don't think you anticipate profit for that region until '25. Is that right?
Marie Owens Thomsen:
Yes, actually we haven't issued a financial forecast for the region. What we do think is that the traffic volumes in China will not reach the 2019 levels before 2025. Obviously it's very hard to know how policies will pan out, but our current assumption is that it will be eased progressively throughout 2023 perhaps with an emphasis on the latter half of 2023. But that even as we come to the end of next year we do not think that all restrictions will be removed yet. So, we're seeing a very slow progression there. And of course any delay to that slow progression is only going to delay the traffic recovery the year at which it might reach 2019 levels, and of course the associated profit profile.
Karen Walker:
And the big key factor in all of this is China. That is again very a important market, it was a very important growth market that's been very much affected by the China's zero COVID policy. So, that's really got to shift significantly for things to move, correct?
Marie Owens Thomsen:
Yes. I mean, it's sort of unfair to the region in many ways that we say Asia Pacific but we're actually thinking China. And of course there are other countries in the Asia Pacific region that are doing much better, but they are nevertheless deprived of the Asia China traffic. So, it does also affect their own performance as it does of course affect the traffic between China and the other regions in the world. But for sure, other countries have opened up more and are doing better than China in the Asia Pacific region and that has to be said. But given the size of the Chinese market, it sort of skews the conversation in an unfortunate way, but still one that makes sense given the magnitudes.
Karen Walker:
So, could you just talk me through some of what I would call outside influences that the industry has to deal with and also have an impact on its profitability or not? So, let's start with the economy, because in general there's a lot of concern about recession. What were the key factors you were looking at in terms of then how that influences where things will be going for the airline industry?
Marie Owens Thomsen:
So, of course as an economist I'm a bit of a stickler for using these terms in a more precise manner, and no offense to anybody out there, but I think that the public uses the word recession in a too liberal manner maybe. And we are not expecting a global recession at the current junction. There are actually not that many global recessions. It's unfortunate that we just had two in quite rapid succession, the other global financial crisis and the one associated with the pandemic. But before that it was the Great Depression. So, global recessions don't happen that frequently. It could happen indeed if China remains in lockdown for longer than what we are currently assuming. So, not saying that it's a zero risk, but it's not our base case scenario. However, maybe about a third of global GDP countries put together could be affected by some form of recession, so obviously we're looking at minus 10 or something in Russia, minus 13 in Ukraine, and we can expect recessions in Germany and the UK and a number of other countries. So, this is why the importance of China is again coming to the fore because if we are not seeing much growth engine being provided by Europe and the US and the Chinese growth engine goes into neutral, then indeed we could be flirting with some very low numbers if China doesn't come back.
Karen Walker:
But we are seeing a slowing of GDP, but you made a very interesting note about some unusual things that are going on in that even with taking and account that slowing, I think you called it a very job-rich economy still. So, talk a little bit about that.
Marie Owens Thomsen:
Absolutely. It's super interesting because, I don't know if you guys remember, but after the global financial crisis there was a lot of talk about the jobless economic recovery. And indeed it took the public years to understand that we had actually started to grow again, primarily I assume because the jobless economic recovery at the time. And now we have the reverse, we have job rich economic slowdown, I think a very rare phenomenon indeed. I cannot at my advanced stage of 61 recall ever having seen such a thing. So, why is this happening? How is it possible that we have such phenomenal job creation around the world in spite of this losing 50% of our growth rate in the space of the year?
And I think that that is intimately related to the fact that we switched off the global economy and now we're switching it on again, and we have sort of a two year catch up to perform. So, all the businesses and our leisure plans and everything is about trying to get back to what we thought we wanted to do in 2019 and haven't been able to do for a number of years. So, of course the next question is how long can this possibly last? Given that we expect a further slow down into next year, I think there is definitely an expiry date on this phenomenon and I would put that expiry date somewhere in the second half of 2023 when unemployment rates can be logically expected to start rising again.
Karen Walker:
Thank you, that really is fascinating. Another sort of outflow outside influence that the airlines have really no control over, but it's hugely important is the price of a oil. And as we mentioned earlier, that has gone up significantly. How do you see that going through 23? I know it's always difficult to project oil prices, but what's your thoughts on that? And there's another interesting thing going on here as well that's a little bit different this time is something called the crack spread. Could you just explain what's going on there as well, please?
Marie Owens Thomsen:
Yes, absolutely. Of course the oil market is notoriously volatile and it's a market that produces very large price swings in response to very small variations in supply and demand, that's always been the case. So, now those price swings are likely to be exaggerated given the war in Ukraine, and notably because there will be an embargo against Russian energy exports from the European side to be implemented on the 5th of February. And the challenge then becomes for the Europeans to try to obtain that energy from somewhere else, which is also extremely difficult and there's not enough ships even so, so we can really have some anxiety about how that's going to pan out and expect a lot of demand and not much supply. So, totally expect to see a price spike around February. But as a trend, I do still think that we have seen most of the oil price inflation and we should all guard against how we imprint very strongly emotionally on these spikes in the old price.
And then we think that lasts much longer than it tends to in reality. So, the average oil price tends to surprise people as a rule because we remember the big numbers. All of that together means that we don't really expect that much more average oil price inflation, but we also don't necessarily think that it's going to drop by any phenomenal amounts, so probably remain in the vicinity of a 100, or 90 to a 100 on average next year.
Karen Walker:
That's per barrel?
Marie Owens Thomsen:
That's per barrel and crude. So, now we come to the interesting crack spread. So, this is what happens when you convert crude oil into some kind of refined product and jet fuel is a refined product. The world has actually reduced its refining capacity for a number of years now, logical response in the face of climate change, it's sort of where we would want the world to go.
But unfortunately when we need that capacity it obviously can create some difficulties for us. The projected refining capacity is also dropping going forward. So, there's no real hope that this relative scarcity of jet fuel coming out of the refineries is going to end anytime soon. So, today we pay a premium so to speak of some 30% on jet fuel, which is of course what airplanes use. And this is a particular handicap then for our industry compared to other industries who will be able to profit or benefit more fully from any crude all price declines than we can expect to be able to.
Karen Walker:
So, what's happening for the airlines is that they always see that they're paying a premium for jet fuel, but it's a wider, bigger premium spread than they've seen historically?
Marie Owens Thomsen:
Absolutely.
Karen Walker:
And it's coming at a time when of course the airlines are still financially recovering, costs are critical in terms of how they manage that.
Marie Owens Thomsen:
Exactly. And if I can jump in there, I think so far we've been protected by this extraordinary lack of price sensitivity and the demand for air transportation I think related to this stop and start thing that we've done with our global economy. But again, we can expect that price sensitivity to return progressively and probably be linked to when unemployment rates start to increase again. So, that's the additional problem going forward in terms of profitability. It's like if demand becomes more price sensitive, it could become more difficult for airlines to actually cover their costs, even if as we all know that's business rule number one, it's cover your costs.
Karen Walker:
Yeah. And I think it probably is worth just noting and saying we're talking about, I mean obviously it is good news to hear the move back towards profitability, but it's still tiny margins in this industry. It always has been, but it's still particularly small at this point. Even the ones that are doing relatively well, as a margin they're not doing well compared to pretty much every other industry. Is that right?
Marie Owens Thomsen:
Yes. It is. And I think we obviously talk about the large cost items, so oil today probably represents around 30% of airline costs and labor probably around a quarter of airlines costs. But then there's the remaining say 50% that also could flip the industry either way, so the message has to be that there's not a cost item that doesn't deserve attention in this kind of environment. And payments for instance is something that doesn't necessarily come to the fore of most people's minds that airlines pay for receiving money paid by credit cards and so on. That's something that could probably be rendered more efficient. Insurance costs are a problem too, I think potentially because there's still 400 planes stuck in Russia. So, either that will come to the airlines through higher insurance premium or through higher leasing fees or both. There are many such items that rarely make it into the ambient debate, but that are also critical at this particular point in time.
Karen Walker:
So, still a lot of challenges, still a long way to go, but definitely light at the end of this tunnel I think for the industry. Again, given the extent of the devastation that was caused by the pandemic, I think for the airlines to be where they are now, albeit still, like I say not where they need to be, it shows a certain amount of resilience of the industry, again, demonstrated that again. And I think maybe it also showed that the airlines have learned some things about what being a resilient company means and having cash reserves and all those things. Do you think the industry has become more resilient?
Marie Owens Thomsen:
Yes. I think that there's definitely been learning from these multiple crises that the industry has of course had to face. And we can see that learning demonstrated in the fact that the previous crises knocked only a couple of percentage points of our activity level, whereas this one basically cost an outright stop to it. And in spite of that, we have arguably recovered then in the space of four years compared to the historic recovery period which tended to be two to three years. So, clearly the industry has learned a lot and manages now to recover even faster than it managed to recover from previous crisis. So, huge respect for excellent crisis management on the behalf of all our airlines. But the issue that the industry is still lumbering with is perhaps robustness, so if we think that resilience is the ability to stand up again once you've been knocked over, then robustness is the ability to not fall down in the first place. And that would be clearly very helpful to our industry.
This is linked to the strength of the balance sheets in the industry, which is not necessarily where it should be. And therefore it's hard for airlines to invest in the robustness that they arguably need for the future. I mean, let's just fantasize for a moment, if airlines could produce their own sustainable aviation fuel wouldn't that be miraculous? Yes, so that we could all continue to fly and generate this benefit for the global economy that our industry and all forms of connectivity does generate. But then it's perhaps 500 million yet to create such a production site, and clearly airlines do not have the balance sheets to be able to do so. So, there we would congratulate the American approach for the stimulus and incentives that are being provided there for sustainable aviation fuel production, and we wish that more countries and regions around the world would follow that course of action.
Karen Walker:
Yes, very much so. That's a whole topic in itself. Marie, it's been delightful to talk with you. I've learned a lot from you yesterday and just now, so thank you very much for your time and for sharing your insights, and we all look forward to seeing what '23 brings for this industry. Thank you to our producer, Guy Ferneyhough, and of course, thank you to our listeners. Until next week, this is Karen Walker signing off from Window Seat.
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