Up in the air – Airlines are recovering from COVID-19 but not without some turbulence

Airplane wing over clouds to illustration aviation finance concept

The weekend of May 7-9 marked perhaps the “beginning of the end” of the COVID-induced downturn for the airline industry. It was the busiest weekend at U.S. airports since the onset of the pandemic, with about 4.8 million people passing through domestic TSA checkpoints, compared to about 550,000 people during the same weekend last year.1

With vaccine rates rising across the globe and with lockdowns and COVID restrictions easing, people are again making —and keeping— travel plans. Carriers are rehiring pilots, airplanes are coming out of hibernation, and call centers are overwhelmed by customers seeking help with their points and vouchers.

Could this be the pivotal turning point for an industry decimated by the global pandemic in 2020? July might mark a return to at least a new normal for the airlines. They are creating schedules that aren’t written in pencil for the first time in a while. But as people book much-awaited vacations and the tourism industry springs back to life, there is still a long way to go. One could best describe the industry’s financial outlook as “please fasten your seatbelts, turbulence ahead.”  

Financially distressed and debt-laden, many carriers need to adapt to an evolving world while working within their balance sheet constraints to return to profitability. As the industry deleverages and repairs itself from COVID, one way for airlines to raise liquidity is to sell a portion of their aircraft assets and instead lease the aircraft. 

Zombie airlines – competing with Zoom and a mountain of debt. 

Governments worldwide have subsidized, bailed out, taken ownership of, and loaned money to pretty much every airline in the industry. As a result, the industry has more debt than ever. This is on top of falling revenue forecasts and further complicated by the disappearance of its biggest and best customer base, globetrotting business travelers, who expect to log more Zoom calls than steak dinners for the foreseeable future.

Passenger traffic decreased 94% during the pandemic’s peak, and the industry’s cumulative losses were at $118.5 billion in 2020. The sector will be unlikely to achieve a return to profitability until sometime in 2022, and even then, the results are expected to vary significantly across the industry.2

Business travel – the most lucrative of all airline customer segments – has yet to show signs of meaningful recovery. Legacy airlines typically book 10 percent of their passengers in business class, although these customers generated roughly 40% of revenue and 80% of profits, pre-pandemic. Some believe it will never recover, but business travel spending is forecast by one organization to claw its way back to about 75-85% of pre-pandemic levels by 2024.3 McKinsey expects business travel to get back to 80% of pre-pandemic levels by then.

With its most important customers tied to home offices worldwide, airlines have their work cut out when it comes to returning to previous profit levels.  A more significant near-term challenge, however, is addressing the debt accumulated last year. The industry took on $180 billion of debt during the pandemic, causing the credit ratings of most airlines to fall. Only one major air carrier maintains an investment-grade credit rating, Southwest Airlines at BBB. It, however, was only one of two airlines that had an investment-grade rating before the pandemic. Delta was the other, although at BBB-, just one notch above high-yield status.

Upward and onward: The return of leisure travel.

Despite airlines’ financial troubles, people want to get on a plane and go somewhere. Google Trends recently reported that of the top 5 “Is it safe to..?” questions people search, three were travel-related, including the top result, “Is it safe to fly right now?” Demand for air travel has ticked back up from the lows of 2020, as shown in Exhibit 1 below.

Demand for vacation travel will likely continue to grow, particularly in the U.S. domestic market. With recent successes in the U.S. containing the virus, 36% of the U.S. population fully vaccinated as of April, and significant scaling back of COVID restrictions, the trend towards normalcy is accelerating domestically. The recovery lags behind internationally, however, with COVID variants springing up in certain areas and causing slower recovery, and with just 4% of the globe vaccinated.

Exhibit 1: Demand for air travel continues to improve

Source: TSA, as of 5/17/2021. Number of passengers passing through TSA checkpoint, 7-day moving average.

Leisure travelers are expected to lead the way in the current recovery, as was the case in previous crises that disrupted air travel. Leisure travel bounced back much sooner than business travel after both 9/11 and the Global Financial Crisis of 2008-09. And it appears domestic leisure will lead the way in this recovery. As of early May, domestic airline passenger volume was 36% lower than pre-pandemic levels, while international travel was down 54%. Domestic flight departures were 30% lower than pre-pandemic levels, while international flights were down by 41% over the same period as of early May.

For sale: Pre-owned 2016 Boeing 777, low miles.

Given the financial pain points in the industry, it is no surprise that airlines are seeking to offload many planes or are holding off on buying new ones. As of January, there were 20% fewer planes in the industry’s fleet as many have offloaded idle planes. With a glut of aircraft on the market, there are deals to be had. A 2016 Boeing 777, for example, which sold for $1.2 million in 2019, is now marketed for around $800,000. 

Airlines, especially the legacy carriers, have historically leased a significant portion of their fleets. It makes sense, as they can quickly add or subtract planes without incurring excessive capital costs. We believe it is likely that the larger— and even smaller carriers — will lease more planes in the future as they seek more flexibility on their balance sheets and as consumer travel trends evolve in the coming years. A need for leased aircraft will likely increase as airlines add more routes to meet customer demands.

Conclusion: Air travel demand is improving, airliners will struggle to meet the demand

No one knows what a return to normal looks like in a post-COVID world, but so far, based on the spring of 2021, the future looks promising. Air travel, which seemed impossible a year ago, is back in demand as people seek vacations and visit family and friends they have not seen in a year. Business travel shows signs of life, and while it may not recover the ground lost over the last 16 months right away, we believe that there will always be a strong desire to meet people in person. While the pandemic was devastating to the travel industry, it is showing signs of coming back. Until then, airlines will likely continue to seek more financial flexibility to repair their balance sheets, which means they will likely lease more aircrafts. 


1. TSA, as of 5/17/2021

2. Source: Airline economic analysis 2020-21,” Oliver Wyman, 5/17/21

3.  Global Business Travel Association, February 2021 forecast.

4. Source: “Back to the future? Airline sector poised for change post-COVID-19.?” McKinsey & Company, 5/17/21

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