- Sustained long-term momentum in the use of air transport in Asia, thanks to the emergence of the middle classes
- Technological advances contribute to cost reduction
- Sector heavily impacted by the COVID-19 crisis
- Sector highly dependent on oil price fluctuations
- Sector hit hard by environmental concerns
Overall, the transport sector (air, road, sea and rail) has been very strongly penalised by the COVID-19 pandemic, and is not expected to return to its pre-crisis level before 2022, according to Coface. However, in the longer-term, the sector should continue to benefit from mobility needs, the emergence of the Indian and Chinese middle classes and the reduction of costs thanks to technical progress, especially in the air and maritime segments.
World trade is declining because of the pandemic: the World Trade Monitor (which measures global goods trade) fell by around 16.2% year-on-year (YoY) in April 2020 (its lowest point), and was 8% lower in the period January-August 2020 compared to the same period in 2019. Airfreight (measured in tonne-kilometre) dropped by 13% YoY over the January-September 2020 period. Global sea freight has also been impacted: the container throughput index (a measure of the volume of maritime container transport, which accounts for 52% of the value of global sea freight) decreased by just over 8% YoY in May 2020, and, even though the index did rebound afterwards (+7% in October) it remains, over the January-October period, 3% lower than the same period in 2019.
Air passenger traffic has practically come to a stop because of the measures taken to combat the spread of the coronavirus (lockdowns, border closures). The daily number of commercial flights decreased by 75% between 16 January and 12 April 2020 (the lowest point), and, even though it increased afterwards, remained on 23 November 38% lower than on 16 January.
The grounding of the Boeing 737 MAX aircraft, following crashes in October 2018 and March 2019, continue to afflict Boeing's financial health, as well as the financial health of the many airlines (particularly U.S. airlines) that use these planes and that have mechanically experienced a temporary reduction in the size of their fleets. However, on 18 November 2020, the Federal Aviation Administration (FAA) authorised the return of the 737 MAX to American skies. Although the outlook for the related air companies remains difficult, this news could somewhat appease the aforementioned issues. Besides this, Airbus and Boeing have been forced to reduce their respective productions due to the COVID-19 crisis, which affects the entire production chain.
Environmental concerns and measures implemented to combat the emission of greenhouse gases or pollutants could penalise the sector.
Sector Economic Insights
The transport sector is at the heart of the COVID-19 crisis
The COVID-19 pandemic and the measures taken to contain it have had a highly significant effect on global economic activity (which was already slowing down in 2019): in 2020, world GDP fell by 4.8% after an increase of 2.6% in 2019. Economic Activity is expected to rebound in 2021 (+4.4% according to Coface) but would remain lower than in 2019. This decrease in economic activity will have an even greater impact on world trade, which was already slowing down before the crisis due to the economic slowdown, affecting the income of companies in the sector. According to the Netherlands Bureau for Economic Policy Analysis (CPB), world trade declined by 16% YoY in April (its lowest point) and by 8% YoY over the January-August 2020 period. Both sea and air freight are being mechanically impacted by the decline in trade. Thus, the maritime transport of goods (which represents 80% of global freight) is declining: the average value of the container throughput index decreased by 3% YoY between January and October of 2020. Airfreight (measured in tonne-kilometre) decreased by 8% YoY in September.
Passenger air transport has been very strongly impacted by the health crisis: in September 2020, international traffic (measured in Passenger Revenue Kilometres (PRK)) decreased by 73% YoY according to IATA, which estimates that airline revenues should decrease by 61% in 2020.
The global aviation market, already impacted by Boeing's setbacks following the crashes of two Boeing 737 MAX aircrafts in October 2018 and March 2019, is also suffering from COVID-19, as Airbus and Boeing, the two largest aircraft manufacturers, were forced to sharply reduce their production, impacting their aircraft equipment suppliers. Furthermore, airlines using the 737 MAX were already suffering from its grounding in 2019: for instance, Southwest Airlines, the company with the world's largest fleet of this aircraft, estimated the loss of operating revenue due to the grounding of the 737 MAX at USD 828 million in 2019.
Estimating the effect on rail freight is more complicated: in some economies, rail freight declined because of COVID-19, as it is complementary to air and sea freight in these countries, to the extent that rail freight is used (alongside road freight) to move goods to and from airports and ports. For example, Union Pacific, one of the largest U.S. rail carriers, recorded a 22% YoY decline in volumes transported between 1 April and 2 June.
In other regions, where rail can partially substitute for sea and air freight, the volumes transported have been able to increase during the COVID-19 crisis. For instance, in Russia, rail freight between China and Europe increased by 35% YoY between January and May.
A difficult recovery for the transport sector
At the global level, the transport sector is not expected to return to pre-crisis levels before 2022. For companies located in countries for which Coface anticipates that the health crisis is largely under control, which should not lead them to apply new measures to contain the COVID-19 epidemic, as should be the case in Asia (Coface's without stop & go scenario), the turnover of listed companies in the transport sector will be 2% lower in Q4 2021 than in Q4 2019. However, it would be 34% lower in the stop & go scenario, leading to an alternation between periods of lockdown and periods of lockdown relaxation, and a return to greater mobility, like it is anticipated in Western Europe, for example. The airline market is expected to be the most impacted: the turnover of its listed companies is expected to decline by 38% in the first scenario and by 69% in the second scenario in 2020. According to IATA, this market will record a loss of USD 118.5 billion in 2020. However, airfreight is expected to take advantage of the situation: as capacity has fallen much more than demand (-29.4% YoY in June against -12.6% for demand), the load factor and the freight rate have increased, leading to a positive net effect: +15% revenue in 2020 according to IATA.
In Europe, air transport, particularly the low-cost segment, is facing a strong overcapacity problem, reducing companies' margins and making them more sensitive to the economic environment and oil price variations. A significant number of airlines went bankrupt last year (WOW air, XL Airways, to name but a few), undermined by the sharp fluctuations in oil prices and the economic slowdown. The COVID-19 crisis could accelerate this trend in the short-term. However, these insolvencies could reduce overcapacity in this market in the long-term, consolidating it and enabling companies to increase their margins.
Environmental concerns are disrupting the sector
In order to fight pollution and address environmental concerns, several measures have been implemented to reduce the impact of the transport sector on health and on the environment. For instance, IATA set itself the objective of halving its CO2 emissions by 2050 (compared to their 2005 level), the European Parliament voted in early 2019 to reduce CO2 emissions from heavy goods vehicles by 25% by 2025 and 30% by 2030, and the International Maritime Organisation (IMO) has set a new limit on sulphur oxide emissions from ships. The latter measure, known as IMO 2020, took effect on 1 January 2020 and limits sulphur emissions to 0.5% (or 5kg per tonne of fuel) compared to 3.5% previously.
Ships have several options for complying with IMO 2020. First, they can use low sulphur fuel oil (LSFO) or marine gas oil (MGO), which will be more expensive than the previously used high sulphur fuel oil (HSFO) due to higher production costs. They also have the option of continuing to use HSFO, if they install purifiers that enable them to emit no more than 0.5% sulphur oxide, but installation is time-consuming and costly. Estimates of the number of ships with purifiers as of 1 January vary between 2,000 and 4,000 ships, while the United Nations Conference on Trade and Development (UNCTAD) estimates the global fleet at over 95,000. Finally, it is possible to use liquefied natural gas (LNG), even though this option seems unlikely in the short-term, as not all ports are able to supply ships with LNG. Therefore, the most likely option for ships in the short-term is the use of LSFO or MGO. In any case, IMO 2020 will penalise shipping companies through the increased costs it induces. The negative effects of IMO 2020 will be all the more significant as the measure comes into force in a context of economic slowdown and deterioration in world trade.
The environmental concerns of consumers are leading some of them to stop flying and look for alternatives to air transport. This movement, known as “flygskam” (literally "the shame of flying") is spreading throughout Europe and the United States, and could have a lasting impact on air passenger transport.
Last update : February 2021