Introduction

Source: IATA/Tourism Economics, Air Passenger Forecasts, April 2020

According to IATA’s report on May.15th, Global GDP will recover to pre-pandemic level in 2021, while that of RPK could only be seen in 2023. Why such a significant difference is forecasted? This article analyzes the situation in two parts: the pushing force for a fast GDP recovery and the pulling force that hinders the RPK comes back. As a whole, they can account for the 2-year late.


1. Government Stimulation

Source: IATA Economics using data from the IMF’s World Economic Outlook, Apr.2020

In a macro scope, the Pandemic leads to insufficiency of effective demand, which further leads to a decrease in productivity and increase in unemployment, the economy is in a stall. To deal with that, governments use fiscal and monetary policies to spur the economy. In the graph, government spending and tax deduction are types of fiscal policy. Loans, guarantee and other acts that will change money supply or interest rate is considered as monetary policy. Two types of policies combine and combo, to affect the economy.

As from the graph, governments are implementing stimulus that never happens before: Germany and Italy give more that 30% of GDP to the whole market, mainly by loans, injection of equity and other monetary policy. This can help firms affected directly. Same pattern is observed in other European countries. While North American and Australian countries tend to use fiscal policy, by increase spending and other “big government” act. China and Japan do it similarly.

Source: Reuters, CNN, various media reports Mar.24 2020

Comparing the data to IATA’s statistics on Mar.24th, European and North American countries give higher financial aid. Germany and France government gives 6 times more stimulus in six weeks, the number of Britain and Spain government is 2 times more. With the policies, however, the exchange rate of Euro maintains, which shows the impact of policies is dealing with lack of efficient demand.

After a clear research of the data from America, Germany, and Australia, there’s ample evidence that the “fiscal stimulus” IATA claims means the sum of all government aid.

Source: IATA Economics using data from Refinitiv Datastream

In short, to the “greatest crisis” after WWII, governments using huge and effective policy to deal with it, which gives GDP a foreseeable pattern of getting back.


2. Confidence and Expectations.

Source: IATA Economics using data from Markit

In Apr.21st report (http://www.martinview.cn/?p=337), IATA separate the business confidence to “manufacturing” and “services”. As previous analysis in Martinview has shown, “service” confidence will regain slower due to its attributes, the “social distancing” expectation let the recover gets harder. But the “manufacturing” confidence regain much faster and more than pre-Pandemic level, which drag the whole confidence (PMI) high. The pattern in Chinese market is valuable for forecast other countries’ recovery.

Source: IATA Economics analysis based on WHO data, and data provided under license by FlightRadar24. All rights reserved.

But in Aviation industry, a different landscape leads to a slow recovery to air routes. Consent with Apr.21st report, the recovery in Chinese domestic market is so steady that can even call “stagnant”, still less than 50% pre-pandemic. Two reasons accredit to that. The first is because Chinese economy is still not fully recovered, the demand is low.  For travelers, the Pandemic still affect their confidence, which leads to a small boarding rate. Some flights once by wide body are changed to narrow body, but can’t be seen in this graph.

The Second is about air travel’s own attribute. As aircraft is a closed space, travelers will tend to consider the infection probability inside is high. Although according to IATA’s report, this is not the case, (the air circulation system inside makes the aircraft as “the most secure” place) people’s instinct will affect their confidence. Here, airlines have to face a dilemma: use social distancing and other ways to stimulate demand, or use current price and layout for a lower RPK. The “social distancing” can increase the confidence, as previous article (http://www.martinview.cn/?p=344)has shown, while in long run it will skyrocket the cost, which can’t stimulate demand in that way. If using current price and layouts, airlines must suffer loss in the short run. Here, a balance is needed.

Source: IATA/Tourism Economics, Air Passenger Forecasts, Apr 2020

As travel restrictions implemented for a while (2-3 months), IATA consider 2020’s RPK will fall drastically. When the industry recovers to pre-Pandemic level (2019 level) in 2023, international market’s demand will fall to 55%, compared to 62.8% in 2019. Those flights are of great profitability in “hot season” (Jun-Sep) due to the long distance, but the Pandemic in hot season let those numbers toboggans. In domestic market, a 50% decrease is seen, compared to up to 20% in GDP. The higher impact will initially postpone the fully recover time. Moreover, even after GDP has recover fully, due to the expectations and confidence is still on their way to original, the demand of travelling is still low, which make the aviation industry’s recovery even harder.

When considering recovery, RPK instead of ASK is used as the scale. Thus, the shortage of demand will hinder the recovery since less passenger will on board.


3. In financial market

Source: IATA Economics using data from the Airline Analyst, own estimates. Mar.24 

In financial market, investors’ doubt on airlines’ profitability will hinder the recovery. In its Mar.24th report, IATA points out the high liability. With a high demand for liquidity, airlines have difficulties in repaying short term debt. After suffering from lack of demand for three months, airlines have to request help for government or just get bankruptcy. The poor ability of fight against risk will lower the passion for investors, for the whole industry. As the industry is not rebounded, investors are likely to wait and see. Though a clear growing pattern will occur in the future, but it would only happen if airlines can go through the period and carry on. If government’s M&A occurs, investor’s rights might be hard to maintain.

In short, the pushing forces to GDP recovery are

1. Monetary and fiscal policy spur economy.
2. Confidence in Manufacture* (http://www.martinview.cn/?p=337) recovers fast, dragging GDP up.
3. According to Chinese Market, consumer confidence (PMI) regains in a clear pattern.

The dragging (pulling) forces to aviation recovery are:

1. The sharp cut off in international flights cuts ASK down, with an ambiguous and long regaining pattern.
2. As part of the industry attribute, Pandemic strikes aviation harder and with a slower pace of recovery.
3. The finance market cast doubt on airlines’ business model, which will lead to lack of liquidity in future recovery.The push and pull lead to the time difference.


Reference:
Pearce, Brain. (2020.May.15). Outlook for air travel in the next 5 years. IATA Economics.

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