Global airlines need to reduce operating costs to tackle revenue losses; IATA

By Rahul Vaimal, Associate Editor
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The global trade association for airlines, International Air Transport Association (IATA) has forecasted that next year airlines will need to reduce their operating costs by 30 percent as the passenger demand still remains way off from returning.

This should enable operators to tackle the 50 percent decrease in pre-COVID-19 levels of revenues.

Airlines have to pay extra for maintenance and repairs as well as aircraft leasing and labour salaries. These costs “are much harder to reduce particularly quickly – and that’s sort of a key reason why airlines were making massive losses in the second quarter and burning cash,” said IATA’s Chief Economist, Mr. Brian Pearce.

But cutting such fixed costs would be a challenging task for airlines. “It is a capital-intensive industry and there are big fixed costs,” said Mr. Pearce. Labour costs are a major portion of expenses and it will be necessary for airlines to keep control of costs to get them down.

“Numbers have improved in the current quarter as most airlines began operating their fleets [again]. This “has brought down unit costs, but in the third quarter we estimate unit costs for the industry are still about 40 percent higher than they would normally be,” he added.

Brian Pearce
Brian Pearce
Chief Economist

“We expecting to see stronger airline revenues in 2021, but we still expect them to be roughly half before the crisis. Airlines need to shrink their costs down to that sort of level to turn cash positive. We did a calculation of how much the workforce would have to shrink to maintain the existing productivity level – and that’s 40 percent. But even that wouldn’t be enough to get that 52 percent reduction in unit labour costs.”

Benefits of oil do not last long

Oil prices have favoured airlines this year as global benchmark crude has fallen by a third since the start of the pandemic. But this may change soon.

Markets expect prices to increase in 2021, meaning that the unit cost of fuel will also increase. “This is not helping close that gap between unit costs and unit revenues,” Mr. Pearce stated.

Business travel is lagging behind

The IATA economist claims that there will be no return to business travel soon. “We’ve been doing monthly surveys of corporate travel buyers, and the one in September showed half of the businesses are expecting business travel at only 10 percent of normal levels. We do think that business travel will return – but we’re not expecting that for probably a couple of years.”

Pre-flight tests

IATA had previously called for systematic pre-flight monitoring instead of the existing quarantine scheme which has harmed air travel demand.

Alexandre de Juniac, IATA, CEO said, “We are discussing with several governments – we see experiments in France, Italy, Germany, UK, Canada, US and some Asian and Middle East countries”.

Recently, IATA has reveals about the travellers decline in the Middle East region this year compared to the last year and also expects a better increase in flyers in 2021.