New travel restrictions, implemented to curb the spread of newly identified COVID-19 variants that appear to transmit more easily, came as a further blow to Europe's aviation industry. More-severe lockdown measures eroded consumer confidence, putting S&P Global Ratings' previous air traffic assumptions of a meaningful summer recovery in Europe at risk.

Although vaccine rollouts offer an encouraging path back to more normal levels of social and economic activity, implementation is proving more complex than expected. Most EU countries got off to a slow start and the new variants have led to concerns over vaccine efficacy. Under our base-case scenario, we now expect the recovery of European air traffic to be weaker, and slower, in 2021 than we previously forecast.

Our calculations suggest the EU could vaccinate 70% of its adult population against COVID-19 by late July 2021, although any significant delays could see this slip to August or September 2021 (see "EU Could Meet 70% Vaccination Target By Late July If Production Steps Up," published on Feb. 11, 2021). Governments might, however, relax restrictions significantly once the more-vulnerable demographic groups have been vaccinated, which could be by the end of April.

Europe's Airlines Are Mostly Grounded, For Now

The outlook for air travel remains uncertain, but we currently forecast that European air passenger traffic and revenue in 2021 will be only 30%-50% of 2019 levels (measured by revenue passenger kilometers, RPKs). As in 2020, European air traffic is likely to underperform global air traffic in 2021, given the prevalence of international travel in the region. Cross-border travel is currently complicated by the multitude of different government travel restrictions and policies, as well as varying COVID-19 infection rates and the unpredictable prevalence of new variants. According to the International Civil Aviation Organization (ICAO) nearly three-quarters of European passenger air traffic was international in 2019, compared with just 16% in North America. A large portion of European international travel (79%) was intraregional.

Our estimate for global traffic and revenue in 2021 is unchanged at 40%-60% of 2019 levels. The global average is boosted by regions where domestic traffic makes up a greater share of the total than in Europe, or where the pandemic is less severe and restrictions less strict. The impact on domestic traffic, while severe, has been far less than that on international travel. Our global forecasts remain largely aligned with those of the International Air Transport Association (IATA, the trade association for the world's airlines). IATA's base-case forecast for 2021 is that global air traffic will be about half of pre-pandemic (2019) levels.

In 2022, we still expect European and global traffic to recover to 70%-80% of 2019 levels, rising to 2019 levels by 2024 (see "As COVID-19 Cases Increase, Global Air Traffic Recovery Slows," published on Nov. 12, 2020).

Air Traffic Recovery Depends On Curtailing The New Variants

Under IATA's downside scenario, global traffic could be as low as 38% of 2019 levels in 2021. This could occur if more severe travel restrictions are needed to curb the spread of new COVID-19 strains. Although vaccine rollouts have created an encouraging path back to more normal levels of social and economic activity, new variants have led to concerns over vaccine efficacy and could depress consumer confidence.

The U.K.'s rollout has quickly gathered pace, but the EU's program started more slowly. Nevertheless, we estimate that most developed economies could achieve widespread immunization by the end of the third quarter, with some emerging markets reaching this target only in 2022. Under our base-case forecasts, we expect the U.K. and the U.S. to vaccinate 70% of its adult population against COVID-19 by July 2021, in which case some important transatlantic routes could open well before then.

However, bookings for the crucial summer period, typically made in the first half of the year, will be lower than we previously expected. Air passenger traffic could see a more meaningful recovery only in the fourth quarter.

Traffic Still Likely To Return To Pre-Pandemic Levels Around 2024

For now, we still assume that air travel in Europe is unlikely to return to pre-pandemic levels until at least 2024. In the longer term, growth in the sector is likely to be slower than the 4%-5% per year we saw over the past couple of decades. The pandemic has accelerated moves toward working from home and use of digital technologies, which could have a lasting effect on demand for business travel. Companies are also likely to rethink their cost saving efforts to support a green agenda, depressing demand further.

The pandemic caused the toughest crisis the aviation industry has ever faced. Global passenger air traffic, measured by RPKs, was just one-third of the 2019 level in 2020 (source: IATA Air Passenger Market Analysis). International RPKs fell to just a quarter of the 2019 level, while domestic travel almost halved. Overall, Europe suffered the worst, losing 70% of its traffic.

It's a similar story when we look at passenger numbers, although they are less affected than RPKs, which include distance travelled. For European airports, we prefer this metric over RPKs, because airport charges are based on passenger numbers. ICAO estimates that European passenger numbers will be about 64%-74% lower in the first half of 2021 than in the same period in 2019.

Where To Look For Signs Of Recovery

There is evidence of a huge amount of pent up demand for travel; when travel corridors have opened throughout the pandemic, bookings have typically surged for certain destinations. We anticipate that the first to recover will be the low-cost and ultra-low-cost airlines and leisure carriers, which serve short-haul networks. Primary airport hubs and legacy carriers will take longer to recover because they rely more heavily on long-haul destinations and business travelers. Although airports that have large origin and destination markets will continue to attract traffic, their network model may change. Airports that depend on full-service carriers, secondary hubs, and hubs serving long-haul networks may shrink.

Both airlines and airports have got better at managing their cost bases and cash burn levels. In addition, some weaker players have downsized operations or even exited the industry. Thus, the surviving operators may find their market positions strengthen over the longer term.

Careful Liquidity Management Remains Key For Airlines

The delayed recovery will fuel further cash burn and debt accumulation for European airlines. Given the much tighter travel restrictions so far this year, net global bookings for future travel were down 70% year-on-year in January 2021, according to IATA, which spells trouble for airlines' cash positions. Given that airline balance sheets are now considerably more heavily leveraged, the accumulation of yet more debt is not good news. Further downside to European airline ratings therefore remains possible, but will likely be selective, bearing in mind the multi-notch downward adjustments made last year (see table 1). Ratings could come under pressure, notably if we perceive increased pressure on liquidity.

Table 1

Balance sheets may have weakened considerably, but for the stronger rated airlines, we do not expect a delay in the recovery to change the shape of their balance sheets in the medium-to-longer term. That said, more prolonged cash burn means that we will continue to monitor liquidity positions extremely closely. Additional government support or new equity could help protect airlines from downside risks.

Almost all our European airline ratings have negative outlooks (with one on CreditWatch with negative implications). This signals clear downside risk to the ratings, which could stem from new COVID-19 variants, particularly if vaccine efficacy is lowered and global travel restrictions are prolonged or tightened. The pandemic is a problem that must be solved globally because there is a risk that more transmissible variants could emerge from countries that have slow or limited vaccine rollouts.

Depressed Traffic Will Stretch European Airports' Credit Ratios Further

Our revised traffic forecasts lead us to expect many European airports to post weaker ratios in 2021. That said, we have not changed our view of the shape and pace of recovery after 2022. We expect ratios to strengthen over the medium term as the recovery unfolds, especially for airports that have greater flexibility to manage cash burn and limit rising debt during the pandemic. Given their strong market position and often-regulated earnings, we typically use a longer forecast horizon for airports than that for most airlines, which are more cyclical.

Most European airports have been downgraded since the start of the pandemic, which should limit the likelihood of further downgrades. That said, all ratings have a negative outlook or are on CreditWatch with negative implications. The airports most at risk have tight financial headroom, limited flexibility to preserve credit quality, and less favorable recovery prospects. That said, our rated European airports have robust liquidity positions and can take mitigating actions like those described below.

Large-scale voluntary redundancies, mothballing of facilities, and investment in new technologies can improve airports' ability to scale down the cost base and investment budgets when traffic is low. As for airlines, when traffic returns, some of the saving could prove permanent, measured by EBITDA per passenger.

In addition to continuing furlough schemes and relief in business rates, European airports have called on the European Commission to relax state aid rules. Rated European airports, apart from those in the U.K., are government-related entities, and could benefit from some form of direct state support.

Other credit-supportive measures such as equity or quasi-equity injections, hybrid capital, or optimizing their capital structure (for instance, through reprofiling of swaps).

Regulation remains difficult to predict in 2021 because long-term traffic is difficult to forecast. Some regulators have publicly recognized that investors in airports need more protection. We therefore expect to see more traffic-sharing mechanisms in future, as well as the use of tools to balance the potential tariff increases, such as phasing of tariffs, compensation via regulatory depreciation, and others.

Stable earnings from other sources can also support airports. Examples include renting real estate or international operations in geographies that have a high share of domestic traffic such as Brazil or India. That said, if the terms of the post-pandemic minimum revenue guarantees are less favorable, revenue from nonaeronautical sources could fall.

Table 2

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing 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.

Related Research

• EU Could Meet 70% Vaccination Target By Late July If Production Steps Up, Feb. 11, 2021
• Industry Top Trends 2021: Transportation, Dec. 10, 2020
• As COVID-19 Cases Increase, Global Air Traffic Recovery Slows, Nov. 12, 2020