Risks to global air traffic and, consequently, aviation revenues are increasing amid the recent spike in COVID-19 cases in many regions, triggering a new round of lockdowns and travel restrictions, particularly in Europe and, to lesser extent, in the U.S. In response, S&P Global Ratings has updated its recovery expectations for the sector.

There's considerable uncertainty regarding the overall outlook for air travel; however, we now believe that 2020 traffic as measured by revenue passenger kilometers (RPKs) and revenues are likely to be 65%-80% lower than in 2019 (compared with our previous estimate of 60%-70% lower). We see a weak recovery in 2021, with traffic and revenues still 40%-60% lower than in 2019 (compared with our previous estimate of 30%-40% lower). This estimate incorporates the recent consensus among health experts that a vaccine may be widely available by the middle of 2021. We also lowered our expectations for 2022, to 20%-30% below 2019 levels (compared with 15%-20%, previously), but continue to expect air traffic to match 2019 volumes by 2024.

We expect actual performance will vary significantly among regions, airlines, and airports.  Within these recovery ranges, we believe Asia is likely to recover faster, Europe the slowest, and North America and Latin America somewhat faster than Europe. Those airlines and airport markets that rely heavily on international traffic (in particular, international long-haul travel) and business and corporate traffic are likely to lag those that generate most of their revenues from domestic leisure travel. We expect airline revenue declines are likely to be at the weaker end of these ranges due to lower traffic and likely lower average airfares stemming from lower business travel and air fare discounts to attract passengers. The decline in air traffic will likely be at the stronger end of these ranges.

Similarly, airports' aeronautical revenues could suffer as much as air traffic.   It's unlikely airports will be able to raise unit charges over the next year and non-aeronautical revenues, such as retail and property, provide little diversification benefit.

We based our updated expectations on recent air traffic trends, which are weaker than previously expected; forward-looking guidance from airlines, aircraft lessors, and airports; and information and analysis provided by other sources such as industry trade groups International Air Transport Association (IATA) and Airports Council International (ACI).

Table 1

This Year Has Been Dismal So Far…

The pandemic largely grounded global air passenger traffic for almost three months in 2020.   Industrywide RPKs fell 94% in April, 91% in May, and 87% in June year on year, as per IATA data. Passenger volumes recovered only somewhat during the northern hemisphere's peak traveling season between July and September. Consequently, for the first nine months of 2020, IATA recorded a 65% plunge in global RPKs compared with 2019 volumes (see table 2). We take into account that domestic travel has proved more resilient, leading the recovery. Still, domestic air traffic was only half of last year's volumes during the first nine months of 2020, according to IATA. Over the same period, international short- and long-haul travel remained hugely depressed, at 72% below last year's results. In late September, IATA lowered its air traffic forecast slightly and now anticipates that global RPK will be 66% down compared to 2019, versus an expected 63% drop previously.

Table 2

…And The Outlook For The Remainder of 2020 And 2021 Is Weaker Than Previously Expected

Our air traffic forecast incorporates the most recent quarterly reporting by the leading airlines, suggesting a much slower-than-expected demand recovery and subsequent capacity cuts.   In response to the gloomy demand outlook, International Consolidated Airlines Group S.A. (IAG, parent of British Airways PLC, Iberia, and several smaller airlines) lowered its planned capacity (available seat kilometres [ASK]) guidance for the fourth quarter of 2020 to a maximum of 30% of its 2019 ASK, from 54% in early September, resulting in a full-year ASK of at most 35% of 2019 levels. Combined with soft-load factors below 50% since the pandemic outbreak, hugely depressed passenger numbers for 2020 are likely. Deutsche Lufthansa AG is telling a similar story. The airline is slashing capacity in the fourth quarter of this year to no more than 25% of the 2019 base. This means 2020 capacity will equal 30% of last year's numbers, at most. Likewise, Ryanair Holdings PLC lowered its traffic assumptions and now doesn't expect to fly more than 38 million passengers in fiscal year 2021 ending March 31, from close to 150 million in fiscal 2020. The number could be less depending on Christmas season traffic and the duration of lockdowns. Consequently, Ryanair cut its flight schedule during winter 2020-2021 to 40% of the previous year's capacity. The airline's targeted load factor of 70% implies limited confidence in any marked demand recovery during the first quarter of calendar year 2021.

Traffic levels for U.S. airlines have been somewhat better (the daily passenger count reported by the Transportation Security Administration is currently at about one-third of last year's numbers), but a modest recovery in early summer sputtered out with a rise in virus cases in southern and western states. A third and larger spike in cases, worse in the Midwest and mountain states so far, is pushing expected traffic gains and better financial performance deeper into 2021. Delta Air Lines Inc., one of the relatively stronger U.S. airlines, now estimates that it may not reach cash breakeven until spring 2021, compared with its previous expectation of year-end 2020. United Airlines Holdings Inc. didn't specify a breakeven time target, but indicated the fourth quarter would still see cash outflow of about $2.5 billion. And, American Airlines Group Inc. forecasts similar cash outflow in the fourth quarter.

Table 3

Potential Rating Implications For Airlines And Aircraft Leasing

We believe our updated traffic assumptions will result in additional rating actions on some airlines, and potentially on some aircraft-leasing companies as well.   We've already lowered our airline ratings by multiple notches (between one and eight notches; see table 3) since the onset of the coronavirus outbreak. Pre-pandemic, we rated just over one-third of global airlines 'B+' or lower, and now we rate about two-thirds of them in this category. We'll continue to review the credit quality of the airlines we rate and update our assessments accordingly.

The more negative global traffic outlook increases pressure on airlines' credit quality and, notwithstanding industry-wide efforts to minimize cash burn rates, ratings remain at risk until passenger confidence is restored and most travel restrictions lifted. Even if vaccines become available by early 2021, it could take many months to reach a large portion of the population and the degree of acceptance and effectiveness is still unknown. In the meantime, airlines will continue to accumulate debt, even as their cash operating losses narrow. This points to a difficult 2021, with a likely slow and bumpy recovery continuing, depending on local authorities adding or removing travel restrictions and quarantine rules and progress on rolling out vaccines.. Furthermore, most airlines have implemented major organizational restructuring programs (including personnel redundancies and fleet downsizing) that have left them substantially smaller than pre-crisis and may take years to unwind.

Nearly all airlines we rate have negative outlooks, reflecting the weak and uncertain outlook for the aviation sector.  Aircraft leasing companies suffer indirectly from the woes of their airline customers, but they're generally better positioned to limit damage to their cash flow and liquidity. We've downgraded only a handful of relatively smaller leasing companies so far, but almost all aircraft lessors have negative rating outlooks (see table 4). However, the more prolonged the airline recovery is, the more airline requests for rental deferrals, return of aircraft from bankrupt airlines, and pressure on aircraft values and lease rates are likely to occur. These trends may depress our forecast credit ratios for aircraft leasing companies, pushing some into downgrade territory.

Similarly, the fallout from declining air traffic could hurt airports' aeronautical revenues, because it appears unlikely that airports can raise unit charges any time soon and the non-aeronautical revenues, such as retail and property, provide little diversification benefit.

Table 4

Additional Downgrades For Some Airports Are Possible

Our updated air traffic assumptions likely means more downgrades for airports over the next few quarters, but on a selective basis.   Airports most at risk for lower ratings have tighter financial headroom, coupled with constraints to reduce cash burn significantly and limit rising debt. Furthermore, we're more likely to lower ratings on airports with less favorable characteristics compared to peers such as heightened airline counterparty risk as well as greater operating uncertainties like stress on future aeronautical charges. We've already lowered our stand-alone credit profile assessments and/or ratings on many airports by one to two notches. We also lowered ratings on some U.S. airport special rental car facilities by two to three notches. Credit quality globally remains under pressure, with negative outlooks or ratings on CreditWatch with negative implications on almost three-fourths of rated airports.

Most airports still have a rigid cost base, so the updated passenger traffic assumptions will sharply squeeze cash flow coverage and profitability metrics.   Similarly, for North America's not-for-profit airport operators, weaker demand combined with an anemic passenger recovery will mean lower coverage, higher airline costs, diminished rate-setting ability for aeronautical revenues, and weaker non-aeronautical revenues.

However, we don't believe depressed traffic volumes in 2020 and 2021 are representative of long-term trends, though we do expect that some business travel may permanently disappear because virtual meetings and working remotely are effective options. Global airports are long-term infrastructure assets with strong market positions and often regulated earnings. Therefore, our analysis places more emphasis on the 2021 to 2023 period. Airports in some markets are trying to right-size operations with aggressive mitigating actions, including large-scale redundancies and scaling down investment budgets. For example, rated European airports' budgets for 2020-2023 are down by about €10 billion compared to pre-COVID budgets, or 40%-50% in relative terms.

To date, other than by the U.S., there's been little direct government support to airports.   In most cases, airports have abundant liquidity, as well as uninterrupted access to the capital markets. In addition, many countries regulate airports, either with light-touch oversight or through revenue caps. Governments rely on regulators to assure airports' long-term financial viability. We expect regulators to wait until traffic recovery is more certain and then stimulate demand by avoiding cost increases, while incorporating airlines' financial health, which highly strained.

In the U.S., the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act) approved by Congress on March 27, provided significant support and liquidity to the aviation industry. While the act designated $50 billion for airlines, it also provided nearly $10 billion to almost all commercial service U.S. airports. Airport operators have also been applying grant proceeds to pay debt service requirements, operation and maintenance expenses, and eligible capital costs. Operators are also often spreading their use of grant proceeds over one to three fiscal years. While the federal grants are providing important liquidity, they're a short-term fix to a longer-term problem of weakened demand, which we see extending beyond our outlook horizon.

Beyond financial forecasts, we also recognize the increased counterparty risk for airports via their exposure to ailing or defaulting airlines.   Airports with lower charges stand a better chance of attracting more traffic as airlines consolidate operations. And, airport revenue diversification is likely to have limited benefits, because commercial revenues (the share of which has risen to 40%-55% of most airports' revenue mix) could suffer more than aeronautical revenues. The drop in passenger numbers will have some effect on retail revenues, but airports will also likely continue to waive minimum guaranteed-income clauses and the global recession will result in less average spending per passenger.

An Uneven Recovery

Domestic leisure travel will likely lead the industry's recovery, with business and international travel lagging.   Unfortunately, for airlines, the latter are their most profitable business. And, some of that weakness may prove lasting to the extent that videoconferencing claims a larger share of business meetings. (Please see "From Bad To Worse: Global Air Traffic To Drop 60%-70% In 2020," published Aug. 12, 2020.)

High Uncertainty Over The Recovery Of Travel Patterns

It is impossible to predict the pace, extent, and timing of recovery in travel patterns with any certainty. We'll likely revisit our assumptions as the pandemic continues to evolve.  

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Table 5

Table 6

Related Research

• From Bad To Worse: Global Air Traffic To Drop 60%-70% In 2020, Aug. 12, 2020
• Industry Top Trends Update: North America Transportation, July 16, 2020
• Industry Top Trends Update: EMEA Transportation, July 16, 2020
• Six European Airlines Downgraded As COVID-19 Impact Erodes Credit Metrics; Majority Still On Watch Negative, May 20, 2020
• Airports Face A Long Haul To Recovery, May 28, 2020