Stock Boeing airline
Bring down the costs further - that's the only short-term solution airlines can come up with to counter revenue losses. Image Credit: AP

Dubai: With passenger demand still some way off from returning, airlines will need to bring down their cost of operations by 30 per cent next year. This should help them counter the 50 per cent drop in revenues from their pre-COVID-19 levels, according to the latest forecasts from IATA.

Airlines have to shell out money for maintenance and repairs as well as on leasing aircraft and labor wages. 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 Brian Pearce, IATA’s Chief Economist.

But it will be a difficult task for airlines to cut certain fixed costs. “It is a capital-intensive industry and there are big fixed costs,” said Pearce.

“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 in order to turn cash positive.”

More job cuts?

Labor costs are a big chunk of expenses and bringing these down will be key for airlines to keep a tighter leash on expenses. “We did a calculation of how much the workforce would have to shrink to maintain the existing productivity level - and that's 40 per cent,” said Pearce. “But even that wouldn't be enough to get that 52 per cent reduction in unit labor costs.”

“Industry has to just get smaller over the next 12 to 18 months - without burning cash.

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 per cent higher than they would normally be,” said Pearce.

Oil advantage won't be there for long

Oil prices have swung in favor of airlines this year with global benchmark crude down nearly a third since the beginning of the pandemic. But this may change soon.

Markets expect prices to rise in 2021, which means the unit cost for fuel will be increasing as well. “This is not helping close that gap between unit costs and unit revenues,” he added.

Business travel lags

The IATA economist believes that business travel will not be back any time soon. “We've been doing monthly surveys of corporate travel buyers, and the one in September showed half of businesses are expecting business travel at only 10 per cent 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 testing instead of the current system of quarantine, which has hurt air travel demand. “We are discussing with several governments - we see experiments in France, Italy, Germany, UK, Canada, US and some Asian and Middle East countries,” said Alexandre de Juniac, IATA’s CEO.