Analysis | Stuck in air travel hell? Blame the long shadow of Covid

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Much of the wealthy world is emerging from two years of pandemic more abundantly than it has ever been. Deposits held by consumers in U.S. commercial banks are about $3.5 trillion higher than they would have been had they continued the pre-pandemic trend, a position that inflation is just beginning to gnaw.

For the airline industry, it’s the exact opposite. While travel volumes are returning to something like normal across most of the world, the legacy of Covid – in the form of the huge debts accumulated over two years on life support – has barely changed. If you’re looking for an explanation for the chaotic scenes of canceled flights, lost luggage and passenger caps at airports this Northern Hemisphere summer, it’s worth considering the drastic reduction in costs the industry will experience during many years to come.

Airlines would love to entice passengers back with the promise of a return to business as usual. The stubbornly persistent debts they hold make this nearly impossible.

Net borrowing by more than 100 airlines worldwide for which Bloomberg has data stood at $377.85 billion in their latest reports, more than a third higher than $281.03 billion at the time. same period in 2019 – and it was already a difficult year for the aviation industry, thanks to rising costs and trade tensions. Compared to 2018, debts have doubled.

While traffic volumes are starting to pick up, profits are not. Profit before interest, taxes, depreciation and amortization for the last 12 months across the sector was $25.77 billion – an improvement over Ebitda’s loss of $45.98 billion. dollars a year earlier, but just over a third of typical pre-pandemic levels.

The relationship between these two numbers is a decent benchmark for a company’s ability to service its debts. Right now it’s a flashing red emergency sign.

Banks begin to worry when their borrowing companies have debts amounting to more than three or four times their ebitda. That number jumped to 4.7 this time two years ago, before dropping off the charts last year when Ebitda turned negative. This year it’s worse than 2020, at 14.7 – levels almost unimaginable for any solvent company, let alone an entire industry. Of 113 companies for which Bloomberg has relevant data, only 23 are able to pay their interest on earnings before interest and taxes.

These numbers could get worse before they get better. Jet fuel prices, which typically account for 20-30% of airline costs, are about 50% above their 2019 levels at $132.31 a barrel in Singapore. Last month, they hit an all-time high of $164.30.

Although net debt levels have fallen slightly since peaking in the middle of last year, the cost of servicing these loans has also skyrocketed as interest rates have climbed. According to a very rough estimate drawn from the yield on US 10-year government bonds, the interest bill for airlines this year is almost double what it was 12 months ago, despite a reduction of 8, 4% of borrowings.

Investors took note. The Bloomberg World Airlines Index, a stock price tracker that rallied remarkably in the year to March 2021, has since trended lower. It is currently at levels comparable to the darkest months of the pandemic.

Travel chaos is best understood as the result of airlines struggling to contain the few costs they can control. About half of the world’s nearly 500,000 baggage handlers were laid off in the early months of the pandemic, and since then tight labor markets have made it difficult for people to return to such low-paying and insecure jobs. This has been compounded by the fact that we seem to be focusing our travel more than ever on peak periods when the pressure on ground services is the highest.

Airlines can also save money if they cram passengers into three flights due to flying a third empty on two planes, one reason many have cut schedules and canceled more departures than usual.

Passengers will always end up blaming the airlines for their travel misery, but any problems being experienced right now are the result of an industry still struggling to survive after two years in limbo. The chaos over baggage carousels and security lines will not improve until airports see their cash flow recover, which in turn depends on carriers contributing most of their revenue by reducing their own debts. At a time of accelerating inflation everywhere, global passenger yields – the amount of money earned for traveling one kilometer per passenger – are still expected to end the year around the same level as 2019, around seven about hundred.

The problem in the airline industry is not that it profits from our misery. It’s that we’re still not willing to pay for the service we want. Until airlines and airports absorb the Covid over-indebtedness, this situation is unlikely to change.

More from Bloomberg Opinion:

• Embattled US Airline Passengers Deserve a Bill of Rights: Brooke Sutherland

• Good luck with your vacation this summer: Andrea Felsted

• Flying was already hellish. Now It’s Worse: Chris Bryant

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.

More stories like this are available at bloomberg.com/opinion

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