IATA Points to Labor as Big Item for Possible Cost Reductions

 - October 27, 2020, 2:45 PM

The International Air Transport Association remains pessimistic on airlines’ ability to sufficiently downsize costs to turn cash positive in 2021 and reiterated its warning that many airlines will go down without a second tranche of government assistance.

According to IATA chief economist Brian Pearce, total industry revenues next year are expected to be roughly half of pre-Covid-19 crisis projections, which means that “airlines will have to shrink their cost base to that sort of level” to achieve a breakeven operating result and stop burning cash. To match the anticipated fall in unit revenue for 2021, unit costs per available seat kilometer (CASK) would need to fall by 30 percent compared to average CASK for 2020, he said, describing such a decline as “unprecedented.” Pearce cited low load factors and weak yields as reasons for the collapse of unit revenue. In absolute figures, IATA is estimating 2021 industry revenue will be down 46 percent compared to the 2019 figure of $838 billion.

Airlines have “done all they could” to reduce costs but progress so far this year is hampered by the industry’s high fixed or semi-fixed costs, Pearce noted.  Around 50 percent of airlines’ costs are fixed or semi-fixed and are hard to avoid or reduce. Airlines have postponed deliveries of new aircraft and are accelerating the retirement of fuel-inefficient aircraft—the rate is expected to be 8 to 9 percent this year, compared with 2 to 3 percent in a “normal” year— but operators are unable to downsize fleet proportionately as the recovery of traffic is mainly on domestic, short-haul routes. Airlines have parked thousands of mostly long-haul aircraft and shifted their operations to short-haul flying where possible. This switch to short-haul flying limits fleet cuts and unit cost efficiencies, Pearce said. Available seat kilometers (ASKs) were 62 percent lower in September compared with January 2019, while the in-service fleet is down just 21 percent, IATA/Cirium Ascend data show.

Labor is the only “sizeable option to cut costs sufficiently” and close the gap with revenue, Pearce asserted. To maintain last year’s level of labor productivity, the number of ASKs produced per employee would require staffing numbers to be cut by 40 percent. Labor unit cost would need to be cut by 52 percent to bring unit labor costs down to the lowest point of recent years, he said, warning that “even with big labor cost cuts break-even will not be achieved.  We will need more assistance from governments in order to preserve jobs and connectivity.”

While pointing to labor as a big item for possible unit cost cuts, IATA stressed that it is not advocating specific workforce reductions or any specific action with regard to achieving cost reductions.  The analysis, it said, is to highlight “that the airline industry cannot slash costs sufficiently to neutralize severe cash burn to avoid bankruptcies and preserve jobs in 2021.”

“The handwriting is on the wall,” commented IATA director general Alexandre de Juniac during a briefing on Tuesday. “For each day that the crisis continues, the potential for job losses and economic devastation grows. Unless governments act fast, some 1.3 million airline jobs are at risk. And that would have a domino effect putting 3.5 million additional jobs in the aviation sector in jeopardy, along with a total of 46 million people in the broader economy whose jobs are supported by aviation.”