The airlines fail to fill the planes and leave profitability behind.

Since the European Union reopened its internal borders to passenger traffic, the sky has gradually filled with planes. On 1 July Eurocontrol recorded 12,742 operations, some 7,650 more than a month earlier, but 64.6% less than on the same day in 2019. On August 1, the European sky recorded 16,174 flights and on the 31st of that month to 18,017, which is slightly less than half a year earlier. Although activity has continued to rise, demand has not responded at the same speed, so that planes have been increasingly empty forcing airlines to reduce their capacity to contain the bleeding of losses.

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According to data published by IATA, the average occupation of European airlines in July was 60.9%, which moves the sector away from the break even point, and translates into a significant number of routes unsustainable from an economic point of view (a year earlier, it was 89%). For example, according to industry sources, Vueling’s occupation in July was close to 60%, while Ryanair filled its planes to 72%, when it normally exceeds 97%. Norwegian had an occupation factor of 62% in August against 90% in the same month of 2019.

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For a flight in Europe to be profitable the company has to have sold 79% of the seats, calculates the main world-wide aerial association (IATA). Some airlines have lowered the profitability threshold to 75%, but in the Old Continent they are exceptions. “According to a sample of 122 companies from various regions, on average, the airlines reach the balance with an occupancy factor of 77%. Only four airlines in the sample could be profitable with occupancies below 62%,” says IATA in a report that warns that leaving a seat empty to respect the social distance would put the sector on the verge of bankruptcy.

In August, the situation has become more complicated in Spain and the rest of Europe due to the resurgence and the imposition of new limitations to travel within the continent (the long radius is still very restricted). The data published by Aena show that passenger traffic has remained low despite the increase in supply from the airlines. Thus, the airport network has seen a 70% drop in passenger traffic in its most important month of the year, while operations have barely been 39% lower than in the same month in 2019. In other words, there have been 61% flights compared to pre-covid levels but the volume of passengers has only reached 30%. At this point, it is worth remembering that from August 15th, when Germany limited the trips to Spain, cancellations shot up, reservations were paralyzed and TUI cancelled all its flights in our country.

“The planes have gone half empty. The occupancy factor determines whether the airlines make money or not with a route, and the data make clear that this is not the case in many of them. Although there are more and more planes, these are going more and more empty because the supply has grown faster than the demand and that is unsustainable,” explain industry sources.

“The airlines have tried to put capacity in the market and lower prices to stimulate demand, but it has not worked. It is the traditional strategy, to put more aircrafts and launch offers, but the paradigm has changed since now the demand is conditioned by the limitations. Countries set quarantines and that’s like banning flights,” says Pere Suau-Sanchez, air transport consultant and professor at the UOC and Cranfield. According to a projection made by IATA, the distance between demand and supply grew in August and was going to follow the same trend in September.

In Europe, for the time being, IAG has further cut its capacity forecast for the fourth quarter, going from a 46% drop in supply to a 60% drop. Along these lines, Ryanair has reduced its capacity from 60% in August to 40%. EasyJet maintains its forecasts after closing July with 84% occupancy. Given the low demand, the airlines are launching strong offers that have already resulted in a decline in average prices this summer and makes it difficult to reach the break even if the occupation is higher.

The situation of European airlines regarding the imbalance between supply and demand is similar worldwide. According to IATA the drop in demand continues to exceed the drop in supply, resulting in an average occupancy factor for all airlines in the world of 58% in July. In North America, where some airlines such as Delta have left a seat free to ensure social distance on planes, this is even lower as they have barely filled 47.6% of the seats. In Latin America it was 63.1%, when the profitability threshold is 79%, and in China it reached 74% for domestic flights.

By Africa Semprún – El Economista