Filenews 24 November 2022
By Eleftheria Kourtali
Hopes for even better days for tourism in Europe next year after the impressive rebound of 2022, lands the rating agency S&P, as it estimates that the travel recovery observed this summer will likely lose its momentum in 2023, while if the conflict in Ukraine or the new variants of COVID-19 cause unpredictable disruption, there is a possibility of travel collapsing.
The energy and inflationary crisis combined with environmental policies are expected to make flying to Europe more expensive. Where will air passenger traffic be formed in 2022 and 2023 and why a full recovery to pre-pandemic levels is not expected before 2024.
In more detail, as S&P notes in its new report on tourism and travel, the recovery in passenger traffic of European airlines this summer has been remarkable. Pent-up demand for air travel after the pandemic, financed by savings accumulated over two years of limited mobility, saw passenger volumes increase. Europe's top airlines reported returns in operating profit in the historically strong third quarter with yields (essentially ticket prices) in some cases exceeding pre-pandemic levels. Strong holdings and the rebalancing of consumer spending from goods to services led to the creation of strong cash flow.
Incorporating traffic statistics from the International Air Transport Association (IATA), S&P calculates European air passenger traffic for the entire year 2022 at 75%-80% of 2019 levels, while for 2023 it estimates that traffic will be around or slightly above 2022 levels (or 75%-85% of 2019 levels), With the (almost) complete recovery to pre-pandemic levels A, it does not occur before 2024.
The picture for 2023 remains unclear, as S&P points out, as bookings are usually made close to the date of travel and are still too early, while most major European airlines have structurally limited or are not yet developing their full capacity before the pandemic. According to S&P's baseline scenario, the travel recovery seen this summer will likely lose momentum in 2023, unless the conflict in Ukraine or new COVID-19 variants cause unforeseen disruption that in this case there is a possibility of travel collapsing.
The industry faces strong headwinds in 2023
While the airline industry is recovering from COVID-19-related mobility restrictions and border closures, 2023 is starting with many challenges and risks, S&P notes.
Consumer spending on air travel will be under pressure, particularly if ticket prices remain high as macroeconomic conditions deteriorate across Europe. S&P predicts a sharp slowdown in the European economy in 2023, fuelled by rising inflation and interest rates, while energy crises persist. It expects companies in a wide range of sectors, including airlines, to find it more difficult to pass on higher input costs to end customers. A weak macroeconomic outlook and high economic uncertainty typically reduce consumer and business confidence and related costs. "We believe that the escalation of energy bills will reduce disposable incomes this winter and during 2023," he said.
Geopolitical and security risks are high and could escalate further. While so far the conflict in Ukraine has had only a marginal effect on the number of passengers on our airlines, the negative effects have been felt by the airlines in the region. In particular, the energy crisis in Europe included interruptions/shortages in gas supplies and rising oil and aviation fuel prices. Going into 2023, a further escalation of the conflict in Ukraine is a clear risk.
Potential new COVID-19 variants could once again discourage travel. While the effects of COVID-19 have certainly subsided, new variants could again threaten demand for air travel, particularly during the upcoming winter. IATA states that the single most important factor in determining the profitability of airlines, and air traffic in general, is still the presence or absence of travel restrictions. European travel is now open, but mobility restrictions remain in other parts of the world, such as China.
Cost inflation (aircraft wages and fuel) is high. The biggest costs of airlines are staff and fuel, S&P points out. Most European airlines, airports and related service providers have greatly reduced staff and salaries during the pandemic. As the pressure to restructure both staff and salaries to avoid operational issues intensifies next summer, hiring issues could persist because unemployment levels in Europe remain surprisingly low despite the recessionary environment. However, as S&P reports, most airlines adjust capacity downwards to ensure operational resilience during the usually loss-making winter season. Aircraft fuel prices remain high and volatile, although many airlines have well offset these costs in the short term.
The depreciation of the euro will continue to put pressure on costs. The strong US dollar (which has appreciated around 10% against the euro in 2022) will continue to cause high costs for European airlines. The cost in US dollars is usually for fuel, aircraft, aircraft lease payments, and aircraft maintenance.
The recovery in corporate travel remains uncertain. While leisure travel led the summer recovery, business travel continued to lag behind particularly in larger companies. Businesses that want to save money are more likely to cut costs and point to environmentally supportive travel policies, particularly if airfares remain high. Digital technologies continue to replace some in-person meetings, with many people still working remotely for at least part of the week. S&P estimates that business travel is at about two-thirds of 2019 levels, but it is uncertain when or if business travel will fully return to pre-COVID levels. New trends have emerged, such as "leisure" travel where people combine business and leisure travel more often (perhaps taking fewer flights than before the pandemic).
Finally, ambitious net-zero carbon targets could prove costly in the medium to long term. The aviation sector is committed to achieving net zero carbon emissions by 2050. IATA says it envisages the introduction of much stronger government policy initiatives, such as incentivising the production of sustainable aviation fuel (SAF). The EU's Fit for 55 proposals could impose minimum SAF ratios (once they become more available at scale), bring about a reduction in allowances under the EU Emissions Trading System and even add an EU-wide fuel tax. S&P believes flights are likely to become more expensive and expects airfares to increase in the long term.
However, as S&P concludes, there are also positive factors that could prevent the collapse of demand for air travel in 2023. These include: pent-up demand is unlikely to be fully met yet, low and falling unemployment rates may help support demand for travel, airlines may transfer much of the cost inflation to customers through higher ticket prices if demand-supply conditions are reasonable, easing COVID-19 restrictions in Asia could boost European traffic airlines, airlines with revenues in US dollars will benefit from US revenue and foreign exchange translation, while capacities have been cut across the European air network and deliveries of new aircraft continue to face delays.
Source:Capital.gr
