How long will it take for airlines to get back to anything compared to normal? And what will that look like, given the potential need for greater spacing on flights, lower demand for Zoom-hit business travel and reticence by the public to fly?
At least for Japan, the recovery to pre-pandemic levels should occur slower than initially expected, and not until the fiscal year ending March 2023, according to Nomura.
It's a brave person who makes too many predictions in today's environment, as I said in noting that Asian shares are generally higher this week despite the instability in Washington. But the Japanese investment bank has taken its best shot at estimating airline trends.
Nomura has just revised downward its earnings predictions for Japan Airlines JAPSY and ANA Holdings ALNPY, which dominate Japanese aviation. Given the likely slow recovery in both domestic and international travel, Nomura now forecasts that travel within Japan will be only 80% to 90% of pre-virus levels in the year ending March 2022, after it previously guesstimated the rebound at 90%.
It is on international travel that Nomura has become particularly circumspect. The March 2022 fiscal year will see passenger levels at only 50% of pre-pandemic levels, Nomura says, down from its previous estimate of 90% there as well. So that's a very significant cut.
Nomura's estimate is based on two assumptions -- no upswing in Covid-19 cases inside Japan, and bar the miracle vaccine we have been promised somehow coming to pass.
I have no confidence there will ever be an effective vaccine against Covid-19. Here in Hong Kong, we are well-aware that one was never found for SARS, even when work continued on that virus after the epidemic ended. Coronaviruses are highly adaptable and mutate. While the mutation isn't as scary as it sounds, not necessarily making the virus any stronger, it does mean the virus is hard to pin down. Similarly, we have somewhat effective vaccines for flu. No cure.
I have more confidence that airlines will recover, but not all of them. Many are going to go under or require drastic government support. I'm dreading the increase in fares that carriers inflict on us once they realize we are willing to travel again and they try to wring out maximum price pain.
Nomura figures Japan Airlines, also known as JAL, will roughly break even in the year through March 2022 despite those lower passenger numbers. ANA would still be posting operating losses at those levels - the one-time upstart All Nippon Airways has a larger fleet than JAL and for some years has been Japan's biggest carrier - but earnings after tax, depreciation and other accounting tweaks may break ANA into the black.
Air travel demand had been recovering over the summer. That was until a big rebound in Covid-19 cases in Japan, a second wave that took daily infections above the level of the first round. For August, revenue passenger kilometers fell 71% year over year for domestic travel at JAL and down 75% at ANA. With ridership on the Shinkansen bullet train rising over the Sept. 19-22 holiday weekend, future air numbers may look better inside Japan.
International travel has plunged out of the sky and is still abysmal, down 96% at JAL and 95% at ANA, with no signs of recovery.
"We think that business demand will fall as web conferencing and other such methods of communication become more widely used," Japan transportation analyst Masaharu Hirokane writes in a note. But the Japanese airlines also stand to gain in the wake of the pandemic, according to Hirokane, who notes that competitors in the West are busy announcing cutbacks of their own and retiring large planes that are expensive to fly. He expects Japanese carriers to focus on their long-haul flights to the U.S., Europe and elsewhere.
The current relatively healthy state of the finances of the two Japanese carriers should leave them in a position to claim market share on those long-haul flights, according to Hirokane. Together with cost-cutting measures, these competitive gains should see operating profits return to more or less pre-pandemic levels in that March 2023 fiscal year.
Japanese companies are able to carry losses forward and offset them against future profits for 10 years. JAL had already been using that method to cut its corporate tax rate to around 5% of profits. It's likely that the Japanese carriers will be paying 0% tax for years to come.
Here in Hong Kong, Cathay Pacific is in the process of announcing massive job cuts. The Hong Kong flagship, with no domestic business whatsoever, has the bulk of its fleet parked in an Australian desert and keeps in the air at all through cargo business. Lufthansa in Germany says it will cut 150 planes from its fleet of 760 aircraft. United Airlines (UAL) will close its base for flight cabin staff at Narita Airport in Tokyo effective this month, according to Nikkei.
By contrast, the Japanese carriers have been able to borrow from their banks to tide them over. They have not announced cuts to the size of their fleet and say they do not plan to cut personnel, either.
"We think that, once demand returns, reductions in overseas airlines' flight capacity will result in higher market share for the Japanese airlines, which are highly competitive in terms of services," Hirokane says.