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The Outlook for Airlines in 2021

2021-02-12

Catie O’Brien of Goldman Sachs Research talks about her outlook for the airline industry in 2021 and why her team is forecasting an uptick in demand in the second half of the year. 

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges of Goldman Sachs when we discuss developments currently shaping markets. Industries in a global economy objects, seaward global, have corporate communications here at the firm Today, we are talking about the outlook for the airline industry, which has been under the gun. With Kitty O Brien of Goldman Sachs Research. We had Katy on the progress in January of twenty twenty, which feels like a different lifetime, and at that point we never could have predicted everything that happened over the course of the past year. That has transformed the airline industry in the world in general. So Katy welcome back to the programme for having me Jake. only when we have you back next. The world will look a little more saying, but clearly, airlines have been one of the hardest hit sectors from covered. Nineteen give us some coffee for how demand has fallen over the past year.
yeah sure so cool it has had the largest impact on air travel. We have on record across the different data, sets that we look at so turning back to last year, the man essentially fell off a cliff as Cuba cases started to rise in the U S, with passengers going from down thirty percent year by year in MID March, to the door mid. Ninety percent range by the beginning of April, bottom, then lasted did the end of May with the month of June, while little better was still down eighty percent and just for some contacts, Jake months following September. Eleven demand in North America with John about thirty percent, so much material impact in the wake of cuban nineteen and turning to nay, demand has recovered further with the recovery remains early, muted, with passengers down just under sixty percent. Over the last week so obviously, that's a pretty grim picture on the demand side has flowed into revenue and profitability for the airlines. Sherry
as to the lack of demand and twenty twenty, not surprisingly, has had a very adverse impact on air and financials, so as a third quarter, twenty twenty actual, Revenue is down just over sixty percent, your rear, similar to the year to date, decline and demand. The impact of profits was eating greater, as the airlines are still relatively high. Fixed costs businesses, even though, as we talked about the last summer's on your pockets, Jake, the proportion of fixed costs, pre covered why lower than it was historically for the industry, but still fairly high level of fixed cost The combined result was that year to date to the third quarter of twenty twenty, the airlines lost just over twenty four billion dollars on adjusted basis and that comparison that income over eleven billion for the first three quarters and twenty nineteen okay? So Obviously, those losses of pretty staggering. Have the airlines been financing those losses? Yes in the airlines have
these substantial government aid to offset losses both in the form of grants to pay employees and the option to apply to a secure long programme, but actually raised even more cash to the capital markets since March. The airlines already it's fifty four billion dollars, be the public debt capital markets in just under seven billion dollars from new equity issuance. So talk a little bit about the stimulus support. How much did the airline industry get and how much did those relief packages mean for the airlines Lasher, yes or under the caravan? Twenty twenty, the airlines receive twenty five billion dollars under the payroll support programme, seven percent of those bonds when the form of grants that do not need to be repaid with the remaining thirty. Precisely in the form of low, entrust long term, unsecured loans and then also under the twenty twenty. That the airlines are able to apply to a five year. Secure loan programme had pretty attractive rates versus the prevailing market rates
The government made an additional twenty five billion dollars billboards the industry under this programme, but not all airlines ultimately decide participate now role forward to this Here the government has once again allocated the airlines additional funds under the broader, really fact, with the remit allocating eighteen billion and peer support to the airline industry this year this comes the condition that airlines need to call back employees that were followed after the expiration of the first people support programme back at the end of September last year, and the government is still in the process of allocating those funds, each airline so. What are we doing to entice people back but to flying under the whole travel industry is a recent giving its marketing efforts, whether airlines trying to do to get people comfortable, fine, again and what's proving most effective. So all the airlines have stepped up there
cleaning protocol, adding elements that I've never heard of before until his ear like sprang, the interior of the aircraft with Anti Microbial missed. In addition to this, the normal cleaning procedures and the airlines has been working to educate the public on the high level of cleanliness held themselves to even prior to co bad, So, for example, airlines have always had happened. Filters word. Tat means the air, in the cabin is completely refreshed every two to three minutes. This hasn't. Then something you typically here and in earnings call from airline management team, but over the last nine months it has Additionally, many airlines have new safety in cleaning information available on their websites. Many have made efforts to spread the word. Media outlets like good Morning, America, for example, and then I should also add that while the scientific community was still in the past does the doing research on the spread of covered most airline the adopted a blocked, little feet strategy as an added precaution, now
Situations like the Department of Defense, among others, have published research uncovered in buying most of US airlines and actually stop blocking the middle see except Delta, which continues to do so in terms of effectiveness. It's hard to say what is built consumer confidence because the same time they ve been rolling out some of these efforts in terms of new cleaner, media, Blitzer, etc. We ve also had he's is rising in the U S, but I will and highlight that we have seen passenger demand in the. U S improve, albeit modestly, from September to today, even as proven cases continued at your house. So we took last year about consolidation, which has been a pretty big trend in the industry, has a pandemic. Stop that consolidation. Are there still signs that the industry's consolidating? So since, spoke last year there haven't been any incremental attempts at consolidating the industry, even driven by the negative impact of
Gilbert, I'm industry, just as reminder. The last merger we have between the public be treated you s. Their lines was back at the end of twenty. Sixteen, when Alaska, fired virgin. America haven't heard me rumbling sands, that's not to say their couldn't be future. Opportune. for further consolidation, although I suspect it likely be amongst some of the smaller the airlines and the top for players already hold over eighty percent of the domestic market so might be tougher to get done from a regulatory standpoint Ok, so vaccines are on the horizon today in reality, in some places for some people anyway. What's the for the industry this year, given the prospect of pudding we're, not least in a more manage will place yes, fingers crossed severe causing that demand for twenty twenty one will still be there. One third less than what we saw twenty nineteen, however, that function of lower. First half of twenty twenty one demand, while the population is still existed
vaccinated with a sharper recovery in this after the year. Our current forecasts for the fourth quarter exit rate of twenty twenty one is that demand will be down a lesser twenty percent versus the same period until nineteen what's yet what further industry more medium and longer term. If we look ahead, will things Normally. Do you think will see a significant shift in business models in the services and products at the airlines are offering yes up in this. short term. I think we could slow down. some innovation on both the consumer facing side and internal systems? As airlines broken I'm paying down debt raised to get them to the cuban downturn could delay some medium term plans as well, because that short term spending breeze over the medium term. I do think it will take them. I am for the airlines to get back to preclude the bubbles profitability due to the increased steadily I just mentioned in it
into what I expect to be lowered ticket prices over the next couple of years. something on those lower ticket prices is really driven by two things: first, a slower recovery from corporate trial. Once you usually pay higher prices for less than bookings and meet your travellers, and then Secondly, a period do what I expect will be more intense competition, as demand will take some time to fully recover. I'm forecasting will take until twenty three four demand fully rebounded twenty nineteen levels, but for the most part I think things will go back to important work normal with his back to product business models and eventually that level profitability, and it is one thing I should mention on the products- and that has and that consumers should be happy about, is that we have airlines do away with change fees for most fair classes.
Was initially to give consumers confidence and booking. Given fluctuation and covid trends and travel restrictions, there will have to say to deceive us evolves kitty. We don't usually talk individual companies here, but it's hard to talk about the airline industry without talking about the Boeing, seven, thirty, seven max. What's the latest, there is grounded forbid last year, but has been approved fly again. What do you see for the future, given demand dynamics that we been talking about. Yes, that's right. Back in MID November, twenty twenty the avail lifted, the grounding that had been in place since March. Twenty nineteen and back rooms RO last year, I would have thought that would have been much more momentous occasion in the airline industry had not occurred in the midst of a global pandemic. So then you know came forward and my colleagues in the global investment Research Department, the cover Boeing recently published at the backlog of orders for the MAX, was only down thirteen percent from the pre grounding high
and then looking at the? U S, airlines that I cover, while some pushed out delivery dates for the max and The other aircraft types due to bad none have cancelled MAX orders and, in fact, we recently thought last that add to its max order high level. You know your while demand is lower airlines therefore need fewer aircraft in the short to medium term. We have seen, the airlines in the? U S, look to speed up retirement of older aircraft, help bridge this gap versus solely looking to cancel or pushed back to breathe new aircraft and fags. My team I recently completed an analysis that shows that the Eu S airlines have retired eight per cent of their twenty nineteen fleet, but by the ended we need twenty one are taking deliveries of new era to the extent we the year end, twenty twenty one fleet will only be two percent smaller than the year on twenty nine cheaply.
So really leaning on retirement of border aircraft to help right size that, U S, fleet, verses, necessarily pushing back to lose you aircraft. Although there has been some rights, I think works all right- well Katy. Hopefully we have your next. The world will look different in the industry will be healthier, but thanks for your yesterday, I hope so things much you haven't me Jake That concludes this episode of exchanged Goldman Sachs. Thank you very much for listening Few enjoyed the shall we hope you subscribe and apple podcasting, liberating or a comment. These two in later in the week for a weekly markets, update we're leisure The firm give a quick taken, what they're watching in markets this podcast was accorded Tuesday January twelve in the year to them
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Transcript generated on 2021-07-01.