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COVID-19 and the aviation industry impact

This is an abbreviated part and summarised version based on the original article.

15 October 2020

Key messages

• Air transport represents a small share of GDP but is closely linked to the activities of other sectors, especially airports and aircraft manufacturing - collectively considered here as the "aviation industry". The aviation industry is a key enabler of many other economic activities.

• The dramatic drop in demand for passenger air transport due to the COVID-19 pandemic and transmission containment measures is threatening the viability of many firms in both the air transport sector and the rest of the aviation industry, with many jobs at stake.

1 Air transport is a small but important part of the economy

The air transport sector (passenger and freight) represents only a small share of OECD countries ' value- added (around 0.3 % on average, see Figure 1). Yet, strong inter-industry linkages with both upstream and downstream sectors make it an important part of the economy.

First, air transport relies on several upstream sectors: support activities to air transportation (including the operation of airports); aircraft manufacturing; rental and leasing services; and refined petroleum manufacturing (including the blending of biofuels). In particular, the air transport sector and airports are inherently intertwined. Some airports depend heavily on one or a few companies that use it as a hub. Shared ownership is common, either by private actors (e.g. Lufthansa owning a minority share in Frankfurt's airport) or by the public sector. The OECD Indicators on Product Market Regulation show that in 2018, the public sector was a shareholder of the largest domestic airport in three out of every four OECD countries and of the largest air carrier in one out of three countries. Moreover, aircraft manufacturers are highly dependent on demand from the air transport sector, directly or through leasing companies. Because both the activity level and the strategic decisions concerning air transport, airports and aircraft manufacturing are linked, this brief considers them jointly as the "aviation industry".

Figure 1. Size of the aviation industry, selected OECD economies

Share in total value added, 2017

1.6%

1.4%

1.2%

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%

• Air transport . Manufacturing of air and space crafts • Operation of airports

FRA DEU ITA GBR AUS CAN JPN USA

Note: Industries based on ISIC Rev.4 classification (Air transport: Division 51; Manufacturing of air and space crafts: Group 303; Operation of airports: Class 5223). Value-added for the operation of airports not available in Australia, Canada, Japan and the United States. Data from 2016 for Canada and 2018 for the United States. Source: Calculations based on the OECD STAN Database, http://oe.cd/stan.

Second, air transport is a key input for downstream sectors, as it enables several economic activities by way of trade in goods and especially in services through the movement of natural persons (i.e. mode 4 services trade). Air cargo is essential for the smooth operations of global supply chains. Business travel is an important channel of international knowledge transfer. The availability of non-stop intercontinental flights is an important determinant of the location of large firms' headquarters, even though the impact of airports on local economic activity is debated. The readiness of flights reaching a large number of destinations is also instrumental for tourism, in particular international tourism.

Beyond inter-industry linkages, air transport is characterised by both complementarity and substitutability with other modes of transport, especially high-speed rail on short- and medium-haul routes. Under pre- COVID conditions, the International Energy Agency estimated that 14% of global flights could be competitively shifted to high-speed rail. Yet, air transport remains essential for territorial cohesion and development convergence as it is often the only viable way of connecting peripheral regions.

2 When the COVID-19 crisis hit air transport, the whole aviation industry was affected

The change in the behaviour of passengers following the COVID-19 crisis, travel restrictions and the ensuing economic crisis have resulted in a dramatic drop in demand for airline services. According to IATA, passenger air transport measured as revenue passenger kilometre was down 90% year-on-year in April 2020 and still down 75% in August. The collapse in economic activity and trade affected freight, which was almost 30% lower year-on-yea r in April and still about 12% lower in August.

The size of the shock has put the liquidity buffers of airline companies under pressure, even if a significant share of its costs are variable (around 50% according to IATA, notably fuel accounting for 25% of the total costs) and the recent drop in oil prices has decreased airlines' operating costs.

In the medium run, airline companies face two uncertainties:

• The cost of health-related measures. Operating costs are likely to increase in the short-run for both airlines and airports because of additional health and safety requirements (e.g. disinfection, PPE, temperature checks or viral tests) before they can be passed on to consumers. Moreover, if implemented for air transport, social distancing measures could force a reduction in the passenger load factor (i.e. the number of seats that can be occupied during a flight) by up to 50%.

• The shape of the recovery for commercial flights. International travel restrictions, the contraction of economic activity and changes in transport behaviour by cautious consumers may prevent a return to pre-crisis demand levels, even as lockdowns and domestic travel restrictions measures are loosened in many countries. Commercial air traffic is slow to recover: as of September 2020, the number of flights remains more than 40% below pre-crisis level globally (Figure 2). This hides differences across flight lengths: the drop is even more pronounced for long-haul flights. In the longer run, changes in consumer behaviour may result in structural changes in air transport demand. Even though the rebound of domestic flights in China suggests that traffic may revert to pre-crisis levels, a permanent drop in demand from pre-crisis levels cannot be excluded, either through modal shifts in services trade (e.g. video-conferencing instead of business travel) or, to a lesser extent, through substitution with other modes of transport (e.g. high-speed trains).

The combination of negative demand and supply shocks and the uncertainty around the medium-run outlook create an uncertain perspective for airline companies. Through inter-industry linkages, this uncertainty affects the whole aviation industry. Moreover, the industry remains exposed to a possible resurgence of the pandemic, as governments may impose new air travel restrictions to tackle flare-ups or a potential second wave of infections. This may threaten the existence of some firms in the industry, as production and revenues are likely to remain inferior to pre-crisis levels for some time.

"

Figure 2. Commercial air traffic, world

Number of flights tracked daily by Flightradar24, 2020 v. 2019

Number of flights 140,000

120,000

100,000

80,000

60,000

40,000

_ 2020

_ 2019

Note: 7-day moving average of the number of commercial flights tracked by Flightradar24 per day (UCT time). Commercial air traffic includes commercial passenger flights, cargo flights, charter flights and some business jet flights; it does not include private flights, gliders, helicopter flights, ambulance flights, government flights, military flights or drones. Source: FlightRadar24 Statistics, flightradar24.com.

Airline companies were in very different situations before the COVID-19 crisis began. In particular, air transport is one of the sectors with the highest dispersion in productivity across firms and, to a lesser extent, in profitability. Airline companies thus entered the crisis with strikingly different abilities to withstand such a shock and heterogeneous prospects for the future.

Bankruptcies or mergers and acquisitions among large companies could have a negative effect on competition in air transport, with possible repercussions on prices. Even if 80% of passenger seats are on routes with several carriers, many of these routes rely on a small number of firms (36% of routes involve only two or three carriers ).

Bibliography

IEA (2020), "Changes in transport behaviour during the Covid-19 crisis", International Energy Agency, Paris, https://www.iea.org /articles/changes-in-transport-behaviour-during-the-covid-19-crisis

International Transport Forum (2020), "Restoring air connectivity under policies to mitigate climate change", COVID-19 Transport Brief, https://www.itf-oecd.org/sites/default/files/air-connectivity-covid - 19.pdf