Airline Sector Looking at Long, Expensive Recovery

Plane-engine maker Rolls-Royce said today it is cutting 9,000 jobs largely in civil aerospace due to the pandemic. "This is not a crisis of our making. But it is the crisis that we face and we must deal with it. Our airline customers and airframe partners are having to adapt and so must we. We must take difficult decisions to see our business through these unprecedented times," said Warren East, Rolls-Royce CEO, in a statement. East added that it would take "several years" for the commercial aerospace market to return to where it was before the crisis. Earlier this month, GE Aviation, General Electric's jet engine unit, cut 13,000 jobs.

The airline sector has been the worst hit amid the COVID-19 outbreak. Even billionaire investor Warren Buffett dumped all of Berkshire Hathaway's holdings. Despite $25 billion in government loans and grants, U.S. airlines still expects to lay off thousands in October when they are allowed to. Investors have cheered recent signs of life. U.S. airlines yesterday delivered good news about rising bookings and slowing cancellations, pushing shares higher. Chinese domestic flights began to recover after new cases slowed. 

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Air travel is showing signs of life, but how long till it recovers to pre-pandemic levels? In a survey conducted by Qualtrics between April 27 - 28, 75% of U.S. adults said they would feel uncomfortable going on a flight. More people feared flying than going to the gym, eating at restaurants or staying at hotels. That's why experts believe the ascent for the sector is going to be slow and not straight upwards.

​IATA, the international trade association, says recovery in air travel will lag economic activity (see chart below). Domestic and short-haul air travel markets are expected to recover over the course of Q3, but long-haul markets will be slower to recommence. The average trip length will decline by around 8.5% this year. IATA predicts international air travel may not recover to 2019 levels until 2023-24. It also said social distancing would reduce the bookable seat capacity for airlines to 62% of normal capacity, but airlines on average break even only when 77% seats are filled. Raising prices would also be difficult amid low demand.

Passengers have shared images of packed airlines on social media lately. Companies are operating dramatically fewer flights right now, so this isn't an indication of demand returning, but it does raise the question of how governments plan to balance preventing outbreaks while putting planes in the sky as economies reopen.

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Source: investopedia