Airlines watching one number, and willing it to rise

TAIPEI – A rebound in bookings and flights has the aviation industry closely watching the ratio of seats being filled, a crucial measure of demand and a guide to profitability. Yet an equally consequential number will need to be tracked if we are to understand whether the sector has truly recovered from the Covid-19 pandemic.

Passenger load factor, a commonly used measure that shows the percentage of capacity utilised, stands at 81.3 per cent in Asia for the year to end-September. That is a huge jump from 69.2 per cent a year ago, and roughly in line with the level recorded for the same period in 2019. Yet operators are running well below pre-pandemic levels, so such standard metrics do not tell the whole story, and indicate that while passengers may be returning, economic uncertainty is holding them back from taking as many flights as they used to.

Airlines around the region are being hit on multiple fronts. First, they fired so much of their workforces that many now lack enough pilots, cabin crew and ground staff to operate aircraft. Cathay Pacific Airways says personnel levels are sufficient for its current schedule, yet it will add 4,000 people in 2023 and needs to double the number of staff it trained in 2022. Carriers also parked their jets in the desert during lockdowns and are still bringing them back home to run the required checks to get the aircraft back into service.

Then there are supply chain bottlenecks caused by the pandemic, Russia’s ongoing war in Ukraine, and a shortage of staff across sectors from technology to food service. These compounding issues range from slow delivery of new planes and a recent scandal around spare parts to catering and replacement tap fixtures.

To help gauge airline health, the industry has a slew of abbreviations. Among the most cited is RPK, or revenue passenger kilometre, which multiplies the number of fare-paying commuters by the distance each person flew. The cargo equivalent is RTK (revenue tonne kilometres). To chart how many an airline could have flown, it uses ASK (available seat kilometres) and ATK (available freight tonnage kilometres).

Aviation is among the most transparent sectors in the world, with most carriers releasing data monthly. Parsing this information, we can see that rosy load factor numbers published in recent months actually hide a deeper truth. Airlines are operating well below the levels of four years ago, but their constrained capacity artificially inflates utilisation figures.

Instead, we need to track a different metric: return-to-normal, which can be abbreviated as RTN. This metric tells us current seat availability as a percentage of the figure for the same period in 2019, before the pandemic.

Measured on this basis, the numbers are even bleaker. China Southern Airlines and China Eastern Airlines, two of the region’s biggest carriers by seats, are operating at only around 90 per cent RTN. For the year to October, Cathay Pacific was running at just 50 per cent RTN. The Hong Kong carrier expects that by December, it will operate at around 70 per cent of its pre-pandemic flights covering 80 destinations.

Across Asia, airlines are running at an average of just 70 per cent RTN for the year to September, according to Bloomberg Opinion analysis based on data from the Association of Asia Pacific Airlines, whose members include Singapore Airlines, Cathay Pacific, Japan Airlines and Taiwan’s China Airlines. This means that even if airlines were running at a 100 per cent load factor – full capacity – they are still operating 30 per cent lower than before the pandemic.

Right now, executives do not truly know whether the high-load factors they are running now will remain elevated when new capacity is added, or if demand for travel is already near its peak. In the past, patterns of demand were quite predictable. Festivals like the Chinese New Year, Christmas and China’s Golden Week boosted bookings. At other times, travellers included business executives and seasonal vacationers.

Already, we are seeing signs that things may not be returning to the old norms. Singapore Airlines, for example, is not enjoying a rebound in corporate travel, which usually fills seats in first class and business class – yet well-heeled leisure travellers are mopping up that capacity. Equally, flights between China and the United States were cut drastically, both by the pandemic and ongoing political friction. If capacity returns, as President Xi Jinping and his US counterpart Joe Biden agreed in November, there is no guarantee that demand will follow.

Many Western business executives have turned cold on China, while three years of closed borders proved to many firms that constant transpacific travel was not needed. Chinese students, academics and tourists are also less enamoured with the US than they were four years ago. Many will resume travel, but thousands will not. We just do not know, and that is the aviation industry’s challenge.

It is impossible to accurately assess if airlines have fully recovered from the catastrophic impact of Covid-19, and whether old travel patterns apply, until capacity returns to normal. BLOOMBERG