BRUSSELS — Airlines are falling over themselves to trumpet what a great summer they’re expecting.
“The message from the top is that aviation is back,” Lufthansa CEO Carsten Spohr told POLITICO this week. “We’ve seen nothing like this in 100 years in terms of the turnaround. Demand is so strong that basically supply cannot cope with it.”
That’s true when looking at the number of people crowding into airports and airplanes and the profits airlines are predicting. But the impact of COVID still lingers in the form of debt from the bailouts that rescued the sector a couple of years ago and now has to be repaid — and rising interest rates make that an increasingly difficult burden.
The pandemic hammered airlines, with carriers globally losing $168 billion in 2020, according to consulting firm McKinsey. Passenger traffic dropped 90 percent that year as lockdowns and travel restrictions brought the industry to a halt.
Dramatic newspaper headlines asked: Will flying ever be the same again?
How things have changed.
Airlines are now expected to reach between 90 percent and 95 percent of their pre-COVID traffic this summer, with some even rising beyond their 2019 level. Ryanair is operating at 125 percent of its pre-pandemic capacity.
Ryanair is expected to post a €1.4 billion profit for 2023 compared to a €241 million loss for fiscal 2022. Lufthansa posted a net income of €791 billion for 2022 compared to a €2.2 billion loss a year earlier. Air-France-KLM posted a net income of €771 million and says it has repaid the pandemic aid it got from the French government.
With the re-opening of the Chinese market, the last (and harshest) of global travel restrictions have been swept away, and airports around the world are crowded with unmasked people.
The regulatory measures brought in to keep airplanes flying and the sector from bankruptcy are being rolled back.
At the end of the month, the EU Digital COVID Certificate — the bloc’s well-received travel pass that kick-started freedom of movement again in 2021 — is set to expire.
Airport slot legislation overhauls brought in to avoid ghost flights during the lockdowns — aimed at preventing airlines from flying without passengers to keep their lucrative landing and takeoff rights at airports — have been scrapped.
Even the issues now facing the industry have a distinctly pre-pandemic flavor. The EU’s second-biggest airport, Amsterdam Schiphol, is in the news over scrapped plans for a new runway and the Dutch government’s pressure to limit flights to not overshoot emissions limits.
Warning signs
The industry says it is better prepared for the rebound than last year, when staff shortages led to chaotic scenes at some airports.
The EU Aviation Safety Agency issued a warning last week to airlines and airports, urging them to boost hiring to avoid “potential safety risks.” It said that “precursors” of “possible disruptions” were already clear in April and May.
But the big worry is over the sector’s debt overhang — a result of COVID-era bailouts.
“The pandemic has gone away but the consequences of the pandemic are very much with us,” said Michael Harrington, director general of aviation lobby group AIRE, which represents carriers including Poland’s LOT and Turkish Airlines.
He estimates that European airlines have taken on around €38 billion worth of debt through state aid packages and bailouts.
“The profitability of the industry — whilst it’s coming back — is not strong enough to sustain the debt and the increased interest that that debt is accumulating,” he said.
A study released last week by the International Air Transport Association (IATA), showed that profitability per passenger for global airlines only hovers around $2.20; in 2019, it was $5.80, although in 2020 it plunged to a $76.20 loss per passenger.
IATA puts it down to higher fuel price costs stemming from the war in Ukraine and the “profound financial disruption” experienced by airlines since COVID.
Some airlines, including Lufthansa, have already paid back their state loans. But Harrington said those that haven’t now face soaring interest costs as central banks hike rates to combat soaring inflation. Airlines “realize that they’re going to have to improve their profitability,” he said.
That could have an impact on the flying public. “There is a danger that aviation is going to become less affordable,” Harrington said.
That’s already starting to happen. EasyJet CEO Johan Lundgren said the average flight ticket is £12 more expensive, while Ryanair’s Michael O’Leary reckons fares are around 15 percent higher.
Many airlines hope holidaymakers, deprived of their full freedom to travel over the past three years, will be willing to pay a little extra. But Harrington said not all airlines will be able to get the pricing balance right, which will hit their bottom lines.
“Either they have to renegotiate the debt, or we’re going to see some airlines going bust,” he said.
