The recent pick-up in air traffic growth will gather pace this summer. This follows the short-lived omicron-related disruption before positive traffic momentum resumed in March 2022 (IATA data; chart 1) and improved further in April and May. Airlines' planned capacity deployment in third-quarter 2022 will likely approach pre-pandemic levels, to match the surge in summer holiday bookings. Assuming no renewed and protracted travel restrictions--and no material impact on demand stemming from the military conflict in Ukraine (as is the case so far)--S&P Global Ratings now forecasts European airline traffic in 2022 will reach 60%-70% of 2019 levels rather than the 50%-65% we projected in February (table 1). We believe that short-haul leisure and visiting friends and relatives (VFR) trips will buoy travel to domestic destinations and cross-Europe air passenger numbers. Furthermore, our 2022 traffic forecast factors in that the current operational disruptions amid significant staff shortages--causing delays, long security queues, and flight cancellations across Europe--will likely weigh on capacity and passenger volumes in the peak season in particular. That said, we think these challenges will ease over time once staffing levels match passenger volumes.

Chart 1

Airlines Have Been Restoring Route Networks

European airlines are confident of a robust summer vacation season underpinned by strong forward bookings and rising yields to above pre-pandemic levels for some carriers. Accordingly, the main European players have announced plans to ramp up capacity, supporting our revised traffic forecast for this year.

Lufthansa is expanding its flight schedules and plans to deploy 75% of its 2019 capacity in 2022, up from the 70% it announced previously.  Lufthansa plans to ramp up capacity in the peak summer months, to at least 85% of 2019 levels in the third quarter of 2022. The airline has said that its short-haul capacity utilization in particular will return to 95% of pre-pandemic levels, while low-cost subsidiary Eurowings' offered seats will exceed those of summer 2019. Capacity on Lufthansa's transatlantic routes will reach 85% in the third quarter. By comparison, the airline's capacity deployment in 2021 reached only about 40% of 2019 levels, bolstered by a solid increase to 60% in the fourth quarter after the reopening of North American destinations from November. Based on current bookings, Lufthansa expects yields to increase by at least the high single digits for the rest of 2022 compared to 2021, and be particularly strong in summer. Overall yields will be higher this year compared to before the pandemic.

Ryanair's current offered capacity this summer is 115% of summer 2019.  The low-cost carrier has confirmed a strong rebound in bookings in recent weeks, supporting a rapid surge in passenger volumes to 15.4 million in May from 7 million in January and surpassing the 12.5 million of May 2019. Ryanair has said it is also determined to restore its load factor (the percentage of available seating capacity filled with passengers) during the peak summer months to an industry-leading low-to-mid 90%--pursuing its load-active, yield-passive strategy. The airline expects its fares in its first quarter (ending June 30, 2022) to be marginally down on its pre-pandemic base, but prices are looking stronger for July, August, and September and should exceed pre-pandemic levels by a low-single-digit percentage. In fiscal 2023 (ending March 31) passenger numbers will recover to above the 149 million of fiscal 2020 to reach 165 million, according to management. This will be underpinned by market-share gains from competitors who have either cut capacity or ceased to operate.

easyJet now expects to fly at 90% of pre-pandemic capacity in its third quarter, ending June 30, and approach 2019 levels by its fiscal year ending Sept. 30, 2022.   This follows the airline building up its operating capacity in March to 81% of 2019 levels and in April to 86%, from only 50% in January. Load factors in the February-April period were good, at 81%-86% compared with 90%-95% before the pandemic. The improving trend should last, with loads surpassing 90% in the summer months according to easyJet's expectations. The airline has confirmed that sold-ticket yields are 15% above pre-pandemic levels for the fourth quarter while ancillary revenues per passenger continue to track at 50% above the fiscal 2019 base.

After a sluggish 2021, International Consolidated Airlines Group S.A. (IAG) aims to ramp up its capacity and rebuild its network in 2022.  In first-quarter 2022, IAG increased its operating capacity (available seat kilometers) to 65% of 2019 levels, from 58% in fourth-quarter 2021. This represented a significant increase compared with 2021, when it flew 36% of pre-pandemic capacity. After the temporary omicron-related air travel slump in January-February 2022, momentum resumed from March. Premium leisure bookings have been particularly strong and yield per revenue passenger kilometers rose by close to 12% in first-quarter 2022 year-on-year. IAG now expects to fly 85% of 2019 capacity by the third quarter of this year, including close to 100% on North Atlantic routes, and rebuild capacity to 80% of 2019 levels in 2022 assuming no COVID-19-related hurdles. This guidance is less than the previously announced 85% because British Airways has cut down on its flights for operational resilience reasons, with the vast majority of reductions focused on high-frequency short-haul routes. These actions are mainly due to the reference-checking process for onboarding new staff taking longer than usual and capacity constraints at Heathrow Airport.

The Traffic Recovery Appears Fragile And The Spike In Leisure Demand Is Unlikely To Be Sustainable

While demand for flights is bouncing back, brewing headwinds suggest the recovery could lose momentum beyond the holiday season or toward the end of 2022, particularly once pent-up demand has been mostly satisfied. As such, we continue to forecast that European airline traffic will reach 70%-85% of 2019 levels in 2023, rising closer to the 2019 base only by 2024 (table 1). Inflationary pressures--with the recent surge in food and energy prices--are rapidly eroding purchasing power, as are potential setbacks stemming from rising interest rates. Higher borrowing costs could prevent households from tapping into excess savings accumulated during the pandemic. This could curb discretionary spending and therefore cool the travel industry's prospects. S&P Global Ratings forecasts that CPI inflation in the eurozone will reach 6.4% in 2022 and a further 3.0% in 2023 (see "Global Macro Update: Growth Forecasts Lowered On Longer Russia-Ukraine Conflict And Rising Inflation," May 17, 2022). We also anticipate a deterioration in consumer confidence if the military conflict in the Ukraine drags on or escalates, noting great uncertainty as to how the conflict might develop.

Furthermore, we anticipate that the recovery of business and corporate travel, which is extremely vulnerable to changes in general health conditions, could drag on. It remains to be seen how well this segment will ultimately recover. The pandemic has accelerated work-from-home trends and the use of digital technologies, which could have a lasting impact on demand for corporate travel. More companies are starting to rethink cost savings in terms of supporting a greener agenda, which will further hamper demand for business travel. Also, a full return to normal long-haul air traffic appears to be on a slower path than short haul. While we anticipate air travel between Europe and North America will follow similar patterns to those we project for intra-Europe, traffic between Europe and Asia will lag that in other regions because of lingering and severe mobility restrictions in major aviation markets, especially China and Hong Kong. According to IATA, long-haul connectivity between Asia and Europe and Asia and North America is only about one-third of pre-pandemic levels.

Table 1

Soaring Oil Prices Are Pressuring Profitability

Airlines' profits are susceptible to elevated jet-fuel prices (fuel being the single largest operational expense accounting for 30% and 50% of total cost under normal operating conditions) even more so amid the lingering uncertain demand. With oil prices surging to a three-year high of close to $125 per barrel in May, airlines' ability to recover additional fuel costs via higher ticket prices will be paramount. We believe strategies such as fuel hedging will help cushion the impact of higher oil prices while creating opportunities to offer competitive fares, thereby filling empty seats and gaining market share. Most European airlines had suspended fuel hedging after demand for flights collapsed during the pandemic, before subsequently resuming it last year as mobility restrictions lifted and bookings picked up. Today, airlines that are not hedged at all or only a little--such as Wizz Air, SAS AB, Air Baltic Corp AS, and Finnair--face an enormous cost disadvantage vis-à-vis better-hedged peers. Our rated carriers Ryanair, easyJet, Lufthansa, and IAG have valuable fuel hedging positions for 2022 (table 2). This mitigates, but does not fully offset, surges in oil prices in the short term. That said, the impact of elevated fuel prices will evolve and the need to pass-through cost inflation to passengers will build as hedging contracts rolled over for 2023 will likely be at higher prices.

Table 2

Airlines have shown they can recoup cost increases of this nature under normal operating conditions. We also note markedly higher fares for this year's holiday season, with some carriers reporting higher yields than pre-pandemic levels. That said, the airlines might find it increasingly challenging to raise ticket prices later in the year if inflation causes consumers to cut back on travel. Segments such as intra-European short haul will also likely see continued fierce competition as airlines work to restore their networks and load factors.

European Airport Numbers Also Point To A Summer Rebound

Most airports are on track to achieve higher passenger volumes than our previous estimates for 2022. However, whether or not this momentum continues after the summer is uncertain. As we look toward 2023, when we expect airports to recover their credit metrics post the pandemic, the pace of recovery and airports' ability to control costs and maintain balance-sheet flexibility will be key points to watch.

Our rated airports have benefited from the same factors that have fueled growing demand for flights, including the relaxation of travel restrictions and the accumulation of disposable incomes during the pandemic. Passenger numbers at European airports were higher in the first half of 2022 than we initially forecast (chart 2). The effect of the conflict in Ukraine on passenger volumes has also been limited outside of traffic to/from Russia, Ukraine, and neighboring countries, which represents less than 10% of passenger volumes for most rated airports. Consequently, we now expect our rated airports to achieve 60%-70% of 2019 passenger levels in 2022--above our January forecast of 45%-65% for the year. This is notwithstanding current operational bottlenecks given staff shortages, which we have factored into our revised projections.

Chart 2

Pent-up demand, mainly for VFR trips, has so far outweighed higher air fares. However, as inflation starts to bite, disposable incomes diminish, and business and Asia-Pacific travel lags, the pace of passenger traffic recovery could decelerate later in the year. We are therefore maintaining our January air passenger traffic forecasts of 70%-85% of 2019 in 2023, and 80%-95% in 2024 (table 4). The ranges reflect our forecasts of different recovery paths depending on the airport's traffic mix. Competitive domestic airports and those with high short-haul traffic should achieve closer to the upper end of the ranges. Those that depend more on long-haul and business traffic are likely to be at the lower end of the ranges.

Table 4

Cost Controls And Balance-Sheet Flexibility Remain Key To Airports' Credit Health

Rising costs will add pressure to airports' profit margins. Combined with heightened capital expenditure (capex) commitments, this will weigh on the credit profiles of most rated airports in the absence of sustained balance-sheet flexibility and timely regulatory support. Airports operating under favorable regulations that allow the pass-through of real-cost inflation via higher tariffs--or that sustainably reduced their cost bases during the pandemic while retaining capex flexibility--will be better placed to withstand inflationary pressures. We note that many airports deferred spending during the pandemic with little room to postpone it further.

Most of our ratings on European airports carry negative outlooks, reflecting limited financial headroom amid lingering traffic recovery uncertainty and a weaker economic environment. Each airport's credit-metrics recovery will vary depending on business and financial characteristics and regulatory circumstances. In Heathrow's case--where we have placed a CreditWatch negative on the issue-level ratings--we are monitoring the pending decision from the regulator Civil Aviation Authority on the rules to be implemented during the H7 regulatory period, to determine if the regulation will remain supportive of the airport's credit quality.

Table 5

Related Research

• Global Macro Update: Growth Forecasts Lowered On Longer Russia-Ukraine Conflict And Rising Inflation, May 17, 2022
• Airline Group IAG Outlook Revised To Stable From Negative On Recovering Air Traffic; 'BB' Ratings Affirmed, April 14, 2022
• How The Russia-Ukraine Conflict Affects European Infrastructure Companies, March 15, 2022
• easyJet Outlook Revised To Stable From Negative On Recovering Air Traffic; 'BBB-' Ratings Affirmed, Feb. 7, 2022
• Omicron Has Only Slowed European Airlines' Climb To Clearer Skies, Feb. 17, 2022
• A Volatile Recovery Ahead For European Airports, Jan. 24, 2022