Airlines report strong recovery despite turbulence

Barry O’Halloran

On Sunday May 22, 2022, 822 passenger flights landed in or departed the Republic Ireland, the figure was just 8 per cent less than the same day in 2019, the last year the air travel industry regards as “normal”. This year’s total was in sharp contrast to May 22 last year, when the State hosted just 124 flights, around 17 per cent of the 2019 figure. At that point the Government was persisting with some of Europe’s toughest travel curbs, including a controversial hotel quarantine that was coming under increasing fire as the EU began re-opening. Even allowing for a later, more cautious re-opening than much of the rest of Europe, Irish air travel has now almost caught up. Shortly before May 22, Aer Lingus chief executive, Lynne Embleton, said the airline hoped to break even this year following two months of losses. She also predicted that it would restore 90 per cent of pre-Covid capacity and said that its all-important transatlantic services were recovering, aided mostly by holidaymakers. The picture is the same in much of Europe. Irish giant, Ryanair, whose network stretches across the continent, was also optimistic when it published financial results in mid May. Its chief executive, Michael O’Leary, said it hoped to fly 165 million passengers through its current financial year, which ends on March 31. That would be significantly ahead of the 149 million people that travelled with the Irish carrier in the 12 months to March 31, 2020, its last pre-Covid year.

Air fares are also expected to rise. Ryanair calculated that they would increase by “mid-single-digit figures” on pre-Covid ticket prices during its second quarter, which includes the peak summer travel months of July and August.

O’Leary highlighted Ryanair’s growth at Dublin Airport when he discussed the airline’s financial results with analysts. The airline will fly 900 times a-week to 120 destinations in what will be its biggest ever schedule at the Irish gateway. Dublin Airport’s owner, DAA, expects passenger numbers to recover to around 70 per cent of 2019 levels, when it handled a record 32.9 million people. That could yet prove conservative, as its biggest customers, Aer Lingus and Ryanair, are reporting strong demand. Other key carriers say the same. Enda Corneille, Ireland country manager for Dubai-based Emirates, says it is selling 95 per cent of the seats on its flights from Dublin. “At the moment long-haul demand is out the door,” he says. The airline chief notes that this is across all cabins in the aircraft, first class, business class and economy. Families are clearly splashing some of the cash they hoarded when lock downs left them little scope to spend. Corneille says holidaymakers regularly show up at Emirates’ check-in desks to hand over €700 to €800 for upgrades from economy to first or business class.

However, the big question is “can it last?” Corneille describes demand for Emirates’ services as “abnormal”, with definite signs that people are treating themselves. He agrees that there is a question over whether all this “is sustainable in the medium term”. Dalton Philips, chief executive of DAA, recently warned in a submission to regulators on airport charges that the pent-up demand of recent months could plateau into next year. Neither Ryanair nor its main low-cost rival, Easyjet, were willing to guide investors on their likely profits this year. O’Leary argued that there were too many variables. Covid still lurks in the background while the war sparked by Russia’s invasion of Ukraine noticeably slowed demand when it broke out in February. Ryanair calculates that the conflict may have cost it around one million in lost bookings in the run up to Easter. Both that and the emergence of Covid’s Omicron strain, which stalled travel around Christmas, have “scarred” the airline, O’Leary said. Further virus outbreaks, an escalation of the Ukraine war or any other bad news could all damage what he calls a “very fragile recovery”. Other threats loom also. One in particular is partly tied to the Ukraine war: high fuel prices. The conflict sent oil prices spiking, to a record $152 a-barrel at one point. Eamonn Brennan, the Irish chief executive of EU air navigation body, Eurocontrol, warned that many airlines are not viable while oil trades at more than $100 a-barrel, which it has been doing all year. So further closures are possible. He also expects some carriers to add fuel surcharges to air fares as 2022 progresses. Higher prices could deter travellers, although the extent to which that is likely to happen would depend on which airlines boost charges and by how much.

Brennan’s warning on airline viability is unlikely to hit Irish carriers. Ryanair has hedged 80 per cent of its needs for the current financial year at less than $70 a-barrel. Aer Lingus parent, International Consolidated Airlines’ Group (IAG), said in February that it was 70 per cent hedged. Even allowing for the considerable cushion that Ryanair has against higher fuel, O’Leary still warned that the 20 per cent that is not hedged could result in the airline facing extra costs this financial year for which it has not budgeted. This possibility was one of the variables that prevented the company from making any profit predictions in May.

While the war in Ukraine drove the most recent fuel-price hikes, airlines face long-term pressure on this front also. In its efforts to tackle climate change, the EU plans to phase out free carbon emissions trading allowances for airlines and end a tax exemption for kerosene – aviation fuel – in a move likely to make flying more expensive. The Economic and Social Research Institute and others calculate that this will cut emissions, as it will make flying more expensive, so fewer people will travel by air. Worldwide, flying accounts for up to 3 per cent of greenhouse gas output. However, the industry remains under pressure over its environmental impact. Airlines are trying to combat this through the introduction of sustainable aviation fuel (SAF), basically low-carbon, mostly synthetic, alternatives to kerosene. Last year, Ryanair and IAG joined the Fuelling Flight Initiative, meant to push the EU on introducing transparent and equitable regulations on the use of SAF.

The EU itself has introduced rules requiring aviation fuel suppliers at airports to blend SAF with conventional fuel from 2025. Starting that year, sustainable fuel will have to make up 2 per cent of the mix, rising to 5 per cent by 2030, 32 per cent by 2040 and 63 per cent by 2050. Manufacturers including European group, Airbus, are designing aircraft to fly on hydrogen, which does not produce carbon dioxide when it burns. However, that is a much longer-term project. Most observers do not expect these to begin materialising before some point in the 2030s. More immediately, increasing the use of SAF and switching to modern, more efficient craft that burn less kerosene make up the twin planks of air travel’s climate strategy. Ryanair is buying 210 Boeing 737 8200s, which burn 16 per cent less fuel. It is taking delivery of around 70 of these jets this year. IAG recently ordered 50 of these aircraft. Whether or not these efforts silence airlines’ critics in the environmental lobby remains to be seen. However, the current pace of air travel’s post-Covid recovery indicates that ordinary people’s appetite for flying has not diminished.

A recession is one thing that could achieve this. Surging inflation and the prospect of higher interest rates in Europe already have some forecasters saying a recession is next. Ryanair believes this is possible, but O’Leary maintains that this could be good for business, as people keep flying, but trade down to cheaper carriers. Stephen Furlong, aviation analyst with stockbrokers Davy says people do trade down during a recession, but some “trade down so that they do not travel”. He also notes that air travel is generally linked to economic growth.

Any reversal to recovery will not just hit airlines and airports, it could also affect the aircraft leasing business, which supports around 5,000 jobs in the Republic, a global centre for this activity. These businesses buy planes, engines and helicopters using a combination of their own cash and debt. They then lease them to airlines around the world. As Covid-19 struck, most sources agreed that less well capitalised lessors could be in trouble, while those with deeper pockets would survive. They also predicted a round of consolidation. That certainly happened with a vengeance. Irish player Aercap bought rival GE Capital Aviation Services in a €24 billion deal last year, positioning it as the biggest in its industry.

More recently, Dublin-based SMBC Aviation Capital bought another Irish business, Goshawk, for €1.5 billion, in a deal that will rank the enlarged group at number two in the world, assuming regulators approve it. Further deals are likely, particularly if slowing demand creates further difficulties for smaller players. The Ukraine conflict caused an unexpected problem for lessors. To comply with sanctions, they ended leasing agreements with Russian airlines. However, they were not able to repossess all the aircraft involved. Aercap chief executive, Aengus Kelly, confirmed that it lost almost €2.3 billion on 113 planes and 11 engines leased to Russian airlines. Another Irish lessor, Avolon, lost €173 million on 10 aircraft that remain in the country. Kelly and Avolon chief executive, Dómhnall Slattery, confirmed that their companies had filed insurance claims for the lost planes and would pursue these. Settling those could take a long time, so neither company could say if it would ultimately be successful.