The “golden age” of commercial airlines—ten years of rapid growth and record profits—ended abruptly in early 2020 with the advent of COVID-19. As the pandemic spread from January to May 2020, seat capacities plummeted from nearly 100 percent to around 20 percent.
Although that marked the industry’s low point, the sector remained severely stressed for three years. In fact, from 2020 to 2022, airline companies’ combined net losses totaled USD 187 billion, erasing most of the profits accumulated during its golden age.
Fast-forward to today: Consumer demand has largely returned, and almost all commercial airlines operate at or near their pre-COVID-19 levels. Despite ongoing challenges, airline companies have shown remarkable adaptability in response to the pandemic, introducing significant changes that benefit their operations and customers.
Fast Fast Forward recently spoke with Stephane Emery about these developments. Stéphane is AXA XL’s Global CUO Airlines and Senior Underwriter Major Airlines. Based in Paris, he has worked in this sector for over twenty years.
Could you start by describing the state of the industry before the pandemic?
Commercial aviation has historically followed a trajectory similar to the global economy; their respective growth rates are highly correlated. During periods of economic expansion, airlines ordered new planes, added new routes and entered new markets. They also suffered during global economic crises, particularly in 2001-2002 after the 9/11 terrorist attacks and the internet bubble bursting, and in 2008, following the subprime mortgage crisis in the U.S.
However, for most of its history, this sector hasn’t been known for its profitability. Until 2009, the global aviation industry had accumulated losses of USD 12 billion.
That started to change around 2009 as rising incomes, increased global trade, and new, more fuel-efficient aircraft helped make air travel more economical for business and leisure travelers, and more profitable for their operators. From 2009 to 2019, annual passenger numbers rose from 2.5 to over 4.5 billion, and revenue passenger kilometers (RPKs) increased from 4.6 to 8 trillion. (RPKs is one of the industry’s key metrics. It is calculated by multiplying the number of revenue-paying passengers by their distance traveled in kilometers.) The sector also maintained positive net profits throughout the decade, including a 6.1 percent net profit margin in 2018, one of the highest in its history.
However, while many North American and Asia-Pacific carriers reported record profits during this period, European and Latin American airlines faced more challenges. Also, low-cost airlines consistently outperformed full-service carriers, primarily due to their streamlined operations and cost advantages.
And then the pandemic hit.
Indeed. Throughout its history, the aviation industry has experienced quite a lot of, well, turbulence, and some once-familiar names like Pan Am, TWA and Swissair couldn’t weather competitive pressures and economic downturns. But it has never faced anything as severe as the pandemic, which caused an unprecedented decline in air travel. Takeoffs, passenger numbers and RPKs all declined precipitously. For instance, the 2020 passenger count amounted to barely 1 billion, down from 4.5 billion the prior year. It was an enormous hit.
However, the impacts weren’t uniform. Regional and low-cost airlines’ more flexible cost structures and lesser reliance on business travelers helped limit their losses. Also, since domestic and regional traffic picked up quickly when the pandemic started to fade, this sector rebounded sooner. At the same time, because we were all at home ordering stuff online, the cargo business was a bright spot for many large, multinational carriers. Air cargo operations also played an essential role in transporting medical goods and supplies.
There were also regional differences. In particular, due to different public health practices and vaccination efforts, the effects of the pandemic receded later and more slowly in the Asian region, and the industry’s recovery there has lagged behind that in the United States and the EU.
Even so, many airlines wouldn’t have survived without government support totaling USD 243 billion—the same amount the industry earned from 2009 to 2019!
What is the state of the industry today?
It has largely rebounded to pre-pandemic levels.
Seat capacity is 94 percent, and jets in service are 99 percent compared to 2019. Revenues are also up and expected to reach USD 996 billion in 2024, 15.2 percent greater than in 2023. Net profits are also slated to rise from USD 23.3 billion in 2023 to USD 25.7 billion in 2024.
On the other hand, the cargo segment is trending downward. After peaking at USD 210 billion in 2021, cargo revenues are expected to fall to USD 120 billion in 2024. However, this represents a recalibration to pre-pandemic levels.
What are some of the industry’s ongoing challenges?
Notwithstanding these optimistic projections, the industry faces multiple challenges.
Many airlines worldwide are under significant financial pressure due to high debt levels, higher interest rates and rising fuel prices. Moreover, a lack of capacity adds to these financial pressures, as supply chain issues affecting the major aircraft manufacturers are causing delays in new aircraft deliveries.
Then there are labour shortages, from pilots to engineers to airport staff and ground handlers. Many older workers retired during the pandemic, and others left for various reasons. When air traffic started to resume, labour shortages caused widespread delays and cancellations. The situation has improved, but the industry workforce is still not back to where it was pre-pandemic.
At the same time, airlines are under increasing pressure from regulators and consumers to reduce their carbon footprints and adopt more sustainable practices. This includes investing in more fuel-efficient aircraft, exploring alternative fuels such as sustainable aviation fuel (SAF) and implementing carbon offset programs.
Finally, geopolitical instabilities and uncertainties are increasing operating costs, disrupting flight routes, affecting passenger demand, and complicating financial and logistical planning. For instance, airlines operating between Europe and Asia have had to reroute due to airspace bans over Russia, resulting in longer flight times, higher fuel consumption and increased operating costs.
How are airlines responding to changing consumer behaviors and priorities?
We are seeing a noteworthy shift in travel demand, leading airline companies to adjust their route networks and fleet compositions. Business travel has been particularly affected, with many companies, especially large multinationals, opting for virtual meetings over in-person travel. However, employees of mid-size and smaller companies are flying at levels similar to the pre-pandemic period; for these businesses, face-to-face interactions remain essential. Unfortunately for airline companies, these travellers are less likely to book business-class seats, the most profitable segment.
On a more positive note, leisure travellers are returning in record numbers. Despite higher prices, leisure travel, especially to domestic and short-haul destinations, has experienced a quicker recovery as people seek vacations closer to home. This increased competition for leisure passengers is, in turn, prompting airlines to invest in improved in-flight services, more comfortable seating arrangements and better onboard entertainment options.
Lastly, the pandemic accelerated the adoption of digital technologies throughout the industry. Online booking, mobile boarding passes and biometric screening have become standard for many passengers. Similarly, artificial intelligence (AI) and machine learning are now optimizing flight schedules, managing crew logistics and personalizing passenger services. As the recent AI boom suggests, this increased reliance on digital solutions will only become more embedded in the industry’s operating models.
Do you have any closing comments?
The commercial aviation industry is a vital pillar of the global economy. It contributes approximately USD 2.7 trillion to global GDP, representing about 3.6 percent of the world’s economic output. Given the industry’s size and scope, it isn’t surprising that airline companies were severely affected by the pandemic.
Nonetheless, as was the case following other “black swan” events, the aviation sector has again demonstrated considerable resilience and adaptability. We’ve seen a strong rebound in domestic travel and a steady, albeit more gradual, recovery in international travel. The long-term outlook remains positive, with projected growth in takeoffs, passenger numbers and RPKs.
Finally, AXA XL is one of the industry’s leading insurers. We participate in and lead many hull and liability, hull war, Excess war liability and hull deductible programs for over 90 percent of airline companies. These programs are typically large, complex and backed by long-standing relationships. We remain committed to this business, supporting our aviation clients in addressing their ongoing challenges and developing innovative solutions to meet their evolving needs.
