📰 Grad Paper Example 1

Graduate Paper 1

February 22nd, 2021
COVID-19 airline passenger demand recovery

The airline industry has been on the frontline of reduced customer demand because of the COVID-19 global pandemic. The transmission of COVID-19 has been aided by air transport and as such policies to close borders and reduce flying have been implemented to stem the spread. Airlines have not coped well with this fallout and the list of airlines that have filed for bankruptcy in the past year includes LATAM, Avianca and Virgin Atlantic to name a few (Laura Bloom www.forbes.com). Just as the impact has been catastrophic the long recovery ahead could also spell disaster for other carriers.

The International Air Transport Association (IATA) as the official standards organization of the airline industry has generated several economic models to project the potential recovery (IATA 2020). The factors that are included in this model are very interesting from an economic perspective and are briefly examined.

From a supply perspective the price of one of the main raw materials of airlines, fuel, went down significantly. Not surprisingly the oil industry was impacted by the supply and demand curves of its own. Worldwide quantity of jet fuel demanded went down due to reduced flying which resulted in lower prices (www.flightglobal.com). In theory this reduction in jet fuel prices should have created greater supply in flights but this was simply offset by the health concerns of the pubic and governments. These health concerns resulted in border closures and as such the industry was strangely in a position where cheaper raw materials could not be taken advantage of and the supply of seats decreased overall in the industry.

Worldwide the real price of tickets was forced to be reduced to entice more persons to travel by air and effectively stimulate demand (IATA 2020). This was not significant enough because the public simply had reduced their preference for air travel and as such the demand curve for the industry shifted to the left. In some instances, the alternative forms of travel for instance trains may have also reduced their pricing and as such caused people to substitute away from air travel. Interestingly many persons would have thought that the industry would have recovered. However, the net effect was that the total demand would have decreased based on the number of buyers reducing.

The recovery of the industry therefore is a combination of these demand and supply curves. Underpinning these though are the GDP and unemployment globally. The GDP was estimated to reduce by 5.2% in 2020 as economic activity slows down in many countries according to the World Bank June 2020. Interestingly, according to the ILO we saw not only a decrease in unemployment in 2020 but also a reduction in working hours for those who kept their jobs (ILO Monitor 2021). This increase was based on the significant number of industries that have been impacted. With these changes, there amount of disposable income and business income available for travel will also decrease. So that the aviation industry will clearly see that overall reduction in passengers along with the other factors that we discussed.

Industry recovery then is a combination of the health situation, policy decisions and the economic conditions highlighted above. The differences the recovery timeframe would depend on the mix of factors by country, region and even airline. Ultimately then IATA predicts that the industry will only return to 2019 levels of demand by 2024.

References:

1. You Won’t Believe How Many Airlines Haven’t Survived Coronavirus. How Does It Affect You?
   Published June 27, 2020 www.forbes.com - Laura Begley Bloom https://www.forbes.com/sites/laurabegleybloom/2020/06/27/airlines-coronavirus-travel-bankruptcy/
2. Economic Performance of the Airline Industry Published June 9, 2020
   https://www.iata.org/en/iata-repository/publications/economic-reports/airline-industry-economic-performance-june-2020-report/
3. Jet fuel prices hit two-decade lows
   Published March 26, 2020 by Cirium
   https://www.flightglobal.com/airlines/jet-fuel-prices-hit-two-decade-lows/137554.article
4. The Global Economic Outlook During the COVID-19 Pandemic: A Changed World
   Published June 8, 2020, 11:38 PM
   https://www.worldbank.org/en/news/feature/2020/06/08/the-global-economic-outlook-during-the-covid-19-pandemic-a-changed-world
5. International Labour Organization. ILO Monitor: COVID-19 and the world of work. Seventh edition
   Published January 25, 2021
   https://www.ilo.org/wcmsp5/groups/public/@dgreports/@dcomm/documents/briefingnote/wcms_767028.pdf
6. Air travel will not recover until 2024 - IATA
   Published July 28, 2020 by Tom Otley
   https://www.businesstraveller.com/business-travel/2020/07/28/air-travel-will-not-recover-until-2024-iata/#:~:text=The%20International%20Air%20Transport%20Association,the%20same%20period%20last%20year