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By Herman Tse, Valuations manager at Ascend by Cirium
The airline industry is poised to bounce back from the turbulence and uncertainty induced by the COVID-19 pandemic. In the financial year 2022, airlines have demonstrated resilience and adaptability by implementing stringent cost-cutting measures, including workforce reductions, fleet optimization, and digitalization of operations, resulting in significantly lower operating expenses.
These measures have enabled airlines to maintain their operations despite the challenges posed by the pandemic. The removal of the strict COVID-related measures has created an opportunity for strong rebound in passenger demand and industry recovery. The financial results of many airlines improved compared to the previous year, with some achieving record-high operating margins.
US carriers have benefited from the early relaxation of COVID restrictions, with domestic travel demand driving the recovery. The reopening of many destination markets has further boosted revenues through international flights. Despite strong domestic passenger demand, US LCCs continue to face stiff competition. The Omicron variant in Q1 and weather disruptions in Q4 had a negative impact on airlines’ financial performance which dampened the full-year results.
European carriers also had an improved year in 2022, with most major airlines showing significant improvement in operating margins driven by the strong increase in demand for air travel throughout the year.
Due to the strong demand and the continued limited capacity, the average air fares increased significantly on most routes, especially in the second half of the year, which has positively impacted airline revenues. Most airlines recorded remarkable revenue improvement in 2022, led by Lufthansa Group which nearly doubled its revenue to 32.8 billion euros. However, capacity shortages due to the lack of pilots, ground handling support, and other resources constrained expansion in terms of the number of flights, particularly during the summer of 2022.
Countries in Asia were slow to reopen their borders, with some, such as Japan and South Korea, only reopened in late 2022, and China and Hong Kong removed quarantine requirements in early 2023. As a result, travel demand remained weak throughout 2022, but there were signs of improvement after the reopening. Some Asian airlines, such as Korean Air and Cathay Pacific, successfully diversified their income sources by expanding their cargo operations, which improved revenues and helped mitigating the impact of fluctuating passenger numbers. However, with the resumption of more passenger flights with belly capacity, the air cargo yield has gone down, even though it remains higher than pre-pandemic levels.
The financial performance of global airlines in 2022 has demonstrated the resilience and adaptability of the industry in the face of unprecedented challenges.
With the removal of COVID-related restrictions and strategic revenue diversification, the sector has managed not only to recover but also to thrive in a post-pandemic world.. The global aviation industry is undeniably on a recovery trajectory, albeit with potential headwinds. Global economic uncertainty means the high inflation and interest rates may potentially impact consumer demand for travel. Fuel costs have been volatile in recent years and are expected to continue to be so, driven by political and economic uncertainty. Nonetheless, the industry continues to rebuild and adapt to ever-evolving market conditions, positioning it for a promising 2023.
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