Airlines Financial Monitor-December 2020

Airlines Financial Monitor	November-December 2020
Key points

• Our final Q3 financial results show that airlines continued to suffer from very weak travel demand and burnt cash, albeit at a slower rate compared to Q2 with the help of cost cutting measures and robust cargo revenues. Initial Q4 2020 earnings announcements indicate that airlines continued to burn cash as the recovery in demand stalled. However, the vaccine news makes us estimate that airlines could achieve cash break-even towards the end of 2021.
• The global airline share price index rose in December but still lagged wider equity markets as the resurgence of the virus weighed on the travel demand recovery. Looking forward, the widespread availability of vaccines and implementation of successful testing regimes will be key for the recovery in travel demand and airline share prices.
• Oil and jet fuel prices went up in January on the back of U.S. fiscal stimulus expectations. However, the near-term outlook for global jet fuel demand is still uncertain as lockdowns and border closures to contain the pandemic remain in place.

European airlines supported the global airline equity index in December

Airline Share Prices

	Index		% change on
US$ indices (Jan 2014=100)	Dec 31st	one month	one year start of year
World airlines	94.4	+2.9%	-30.2%	-30.2%
Asia Pacific airlines	77.5	-2.4%	-29.5%	-29.5%
European airlines	85.2	+9.6%	-24.7%	-24.7%
North American airlines	115.0	+0.9%	-31.5%	-31.5%
FTSE All World $	165.0	+4.5%	+14.1%	+14.1%

Index (Jan 2014=100)

160
140
120
100
80
60
2014	2015	2016	2017	2018	2019	2020
		FTSE All World $	World airlines $

Source: Refinitiv Eikon Datastream

• Following the vaccine rally in November, airline shares with the exception of European airlines underperformed wider equity markets in December. While the expectation of fast rollout of vaccines is reflected positively in European carriers, Asia-Pacific airline shares declined as the resurgence of the virus halted the recovery in demand in main Asian markets.
• Overall, global airline shares ended the year 2020 down by 30% diverging from the wider equity markets (+14.1%) as the pandemic caused travel demand to plummet. 2021 will also be a challenging year for airlines. The widespread availability of vaccines and implementation of successful testing regimes will be key for the recovery in travel demand and share prices.

Airline industry continues to report deep losses and cash burn

	Airline Financial Results							• Latest airline financial data for Q3 shows that airlines in
	Number of					Q3 2019		Q3 2020	all regions posted another quarter of net loss. While
	airlines in	Regions				EBIT	Net post-tax	EBIT		Net post-tax	North America reported the largest net loss, Asia-Pacific
	sample					margin1	profit2	margin1	profit2	airlines' net loss declined compared to the previous
27	North America				11.7%	5,433		-43%		-10,975
					quarter amid the recovery in large domestic markets
29	Asia-Pacific				6.3%	485		-41%		-5,647
												and the strong cargo revenues.
15	Europe				17.3%	6,076		-45%		-8,095
8	Latin America				11.2%	2		-94%		-1,772	• The industry continued to burn cash in Q3. Net cash
4	Others				17.0%	220		-83%		-234
	83	Sample total				12.1%	12,216		-45%		-26,723	outflow from operating activities rose to 51% of
	1% of revenues	2US$ million							revenues as the decline in operating costs was not
	Sources: The Airline Analyst, IATA										enough to compensate for the revenue loss. Capital
	Airline Cash Flow1										expenditures rose to 14% of revenues although airlines
	Number of					Q3 2019			Q3 2020	were deferring aircraft deliveries. Among all regions,
							Asia-Pacific was in a relatively better position in limiting
	airlines in
	Regions		Net cash	Capex	Free cash	Net cash	Capex	Free cash
	sample			flow2	flow	flow2	flow	free cash outflow.
13	North America	12.4%	8.8%	3.6%		-68.8%	20.6%	-89.4%
												• Looking forward, airlines will continue to suffer from
24	Asia-Pacific	9.7%	11.2%	-1.5%		-17.0%	4.6%	-21.5%
11	Europe	8.8%	9.6%	-0.8%		-61.0%	14.5%	-75.5%	subdued demand and turning cash positive will be the
6	Latin America	12.4%	8.5%	3.9%		-46.6%	14.3%	-60.9%
4	Others	16.6%	8.2%	8.4%		-46.6%	21.8%	-68.4%	key target for the industry. We see a possibility of
	58	Sample total	10.8%	9.5%	1.3%		-51.4%	14.1% -65.6%	turning cash positive at aggregate level in Q4 but until
	1% of revenues		2From operating activities
							then further support for survival from governments will
	Sources: The Airline Analyst, IATA
										be critical for survival.
1											IATA Economics:www.iata.org/economics

Index (Jan 12 = 100, inverted) 90

Matching costs with lower revenues remains a challenge

Operating revenues and cost changes in Q3 2020

	40%
year-on-	20%
0%
year	-20%
change	-40%
-60%
%
	-80%
	-100%

Passenger Cargo	Total	Total	Fuel	Landing &	MRO	Labour
	Revenue	Cost		user
				charges

• Airlines in all regions posted sharp declines (-80%) in passenger revenues in Q3 2020 as the recovery in air travel demand was limited, and airlines aimed to stimulate demand by lowering fares.
• On the other hand, cargo revenues were strong since the economic activity rebounded quickly during post lock-down period. In addition to the rebound in cargo demand, cargo yields soared since the recovery in belly cargo capacity was limited and the conversion of passenger aircraft to cargo aircraft was not enough to compensate the loss in belly cargo capacity. As a result, cargo revenues in our sample of airlines improved by 17% year-on-year.
• Reducing operating costs was the main focus of airlines since the pandemic hit. However, the decline in operating costs (-43% in our sample) was much lower than the loss on the revenue side (-66% in our sample). Variable costs such as fuel and selling distribution declined in parallel with the loss in revenues. Also, airlines took initiatives to reduce their fixed or semi-fixed costs, e.g. employment costs were reduced by 27% in 3Q20 compared to 3Q19.

Oil and jet fuel price rose on U.S. fiscal stimulus expectations

US$/bbl

160
140
120	Jet fuel (LHS)	Weaker US
		dollar, higher oil
100		prices
80
60
40	Brent crude oil (LHS)	US dollar trade-
		weighted index (RHS)

20

2013 2014 2015 2016 2017 2018 2019 2020 2021

Sources: Platts, Refinitiv Eikon Datastream, as of January 12th

• Oil and jet fuel price further strengthened in January amid hopes that the new U.S. administration would

95 announce a stimulus package that would be supportive

100	for oil demand. At the time of writing, Brent crude oil and
	the jet fuel price were US$56/bbl and US$61/bbl,

105	respectively.

110 • Despite the recent strengthening in prices, lockdowns

115 and border closures to contain the pandemic remain in

120	place, raising concerns about the near-term oil demand.
	Taking into account weaker demand prospects in the

125	near future, OPEC+ decided to delay a further easing of

130 supply cuts in January. Although the recovery in oil

135 demand is fragile in the near-term, a widespread vaccination and an acceleration in economic activity is expected to support demand in the second half of the year.

IATA Economics

[e-mail]

21st January 2021

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2	IATA Economics:www.iata.org/economics