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Slashing jobs ‘won’t save airlines from insolvency’

Airline association Iata has warned slashing labour costs will not save carriers from insolvency without state aid.

The gap between airlines’ costs and diminished revenue remains too great to survive without government financial support even if jobs and pay were halved, Iata reported.

Brian Pearce, Iata chief economist, issued a stark warning, saying: “We expect stronger revenues in 2021, but expect these to be only about 48% of what we expected before the crisis.

“Airlines need to shrink their costs to that level. The industry has to get unit costs down to the level of unit revenues, with very low load factors and very low yields. That is the scale of the challenge.”

But he said: “Many airline costs are fixed or semi-fixed.”

Pearce reported Iata examined the finances of almost 80 airlines and concluded “they were not able to reduce costs proportionate to revenues”.

He explained: “Aircraft are a major fixed cost. Airlines are retiring older aircraft. But in-service fleets can’t be reduced in proportion to capacity because flying today is mainly short-haul. Fleet [use] is down just 21%.

“The costs are difficult to avoid and have to be spread over a smaller number of passengers.

“Lessors have been making deferrals or reductions in costs, but it is a 5%-10% fall on a year ago against an 80% fall in revenues.

“Fuel is usually the largest cost and the industry has been helped by the low fuel price. But if you’re not flying much, it is not much help.

“Airport charges are down about 60%. But this is entirely because no aircraft are landing. The concern is airports will try to increase charges to recover lost revenue.

“The only possible option for airlines to close the cost and revenue gap is to look at labour costs.”

Pearce said: “The unit labour cost in the industry is typically $2-$3 per ASK [available seat km]. In Q3 this year it will be about $7.5.”

He argued: “Even with a 52% cut in labour costs, unit costs would still outweigh forecast unit revenue by 10%-15%. So the industry will be burning cash in 2021.”

Pearce insisted: “If we’re going to avoid significant numbers of airline failures, we either have to see a change in the revenue situation – an effective testing regime allowing travel restrictions to be reduced – or we need to see more support for the industry.”

He added: “We estimate job losses of 30%-35% announced so far. Even 40% would not be enough to bring labour costs down [sufficiently] and we’re not sure airlines would be able to do that.

However, he insisted: “By no means are we advocating job cuts. We want to preserve employment.

“The industry has to get smaller given the much-reduced outlook for travel. The exercise shows it is going to be really difficult. We need to see action from governments to ease travel restrictions or to give more assistance.”

Iata director general Alexandre de Juniac agreed, saying: “We are not advocating lay-offs. We are saying costs have to be adjusted in line with revenue.

“If airlines cut jobs it is because otherwise they die.”

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