The Asian markets are expected to recover faster and the countries that infused stimulus packages into their economies such as China, France, Germany and Spain will have it easier to flex their muscle in the context of getting back their GDP figures quicker than those countries which did not take that measure.
by Dr. Ruwantissa Abeyratne
writing from Montreal
The Economist Intelligence Unit (EIU) has released its latest figures on the effect of the pandemic on global trade. These figures have a direct bearing on the progress of the air transport industry which went down by 98% in passenger carriage and suffered minimal cargo carriage in April this year. According to EIU, global Gross Domestic Product (GDP) will contract to -4.8% each year at least until 2023. There will be a full recession from 2020 onwards in the G-7 countries United States, Canada, France, Germany, Italy, The United Kingdom and Japan. China will retreat in its GDP from 5.9% to 1.4 and global trade will go down by a massive -22.6%.
Although recovery may come in the second half of the year it will be slow, barring a second or third wave of the virus spread. With global sales down from 50% a few months ago to 90% and a vaccine foreseen only in late 2021 (with questions as to effectiveness, as the flu vaccine is found to be only 50% effective), one cannot be sanguine about a speedy recovery. The following countries whose decreased GDP figures reflect a dismal picture will face a daunting and uphill task. The figures are as follow: European countries: -8.3%; Russia: -5.2%; India: -5.8% (which will pick up quicker than other countries); China: -1.4%; Japan: -5.2% (forecast for up to 2026); United States: -4.8%; Asian countries overall: -1.8% (expected to pick up in 2021): Middle East and North Africa: -5.2&%.
The Asian markets are expected to recover faster and the countries that infused stimulus packages into their economies such as China, France, Germany and Spain will have it easier to flex their muscle in the context of getting back their GDP figures quicker than those countries which did not take that measure. Although domestic tourism will increase, tourism will be one of the slowest industries to recover with small countries that depend on tourism to boost their GDPs being hit hard.
Big foreign investors will be hit hard as well with countries increasing their global vigilance on foreign transactions and deals. It is also predicted that Russia and China will bolster their global standing accelerating and adding to geo-political fragmentation. There is no prediction yet of the end of globalization but it is foreseen that there will be an increasing focus on the resilience of the supply chain. Strategic stocks such as pharmaceutical products will be more valuable and belligerence and hawkish foreign policy in the world politics may increase.
EIU does not discount the fact that Covid-19 will drive the global economy into a depression with United States and China splitting the global economy if the current impasse between the two countries is not arrested. In other words, global trade will be adversely affected if trade relations between the United States and China are not normalized.
This trade scenario has affected the air transport industry severely. The International Air Transport Association (IATA) - the global trade association of the world’s airlines whose membership comprises all the airlines that account for more than 80% of the world’s air traffic - says that 61% of passengers now book their travel just three days in advance as against 46% previously, which makes schedule planning a serious challenge for the airlines. Geo-politics is also a pervasive factor as for example, the Lufthansa Group has said that when the United States suddenly shut the European carriers out of its skies after the virus spread, 70 flights per day had to be cancelled out of their originating points into the United States.
This global economic and trade deficit will make airlines rethink where to fly; what equipment (aircraft) to use; and what their pricing mechanism would be in the “new normal”. One of the airline representatives speaking at a recent webinar said that his airline has started to carry harvest workers to keep the food chain going: a category that was not catered to by air transport before.
In April this year, IATA, together with Oxford Economics stated that generally, economic activity generated by air transport was down by 80%. IATA in April 2020 also stated: “This is contingent on domestic markets opening in Q3 (the third quarter), with a much slower phased opening of international markets. This would limit the air travel recovery, despite most forecasts pointing toward a strong economic rebound late this year and during 2021. In 2021 we expect global passenger demand (measured in revenue passenger kilometers, RPKs) to be 24% below 2019 levels and 32% lower than IATA’s October 2019 Air Passenger forecast for 2021.
We don’t expect 2019 levels to be exceeded until 2023.
As international markets open and economies recover, there will be further growth in air travel from the 2020 low point. But even by 2025 we would expect global RPKs to be 10% lower than the previous forecast”.
IATA has given its pessimistic scenario based on “a slower opening of economies and relaxation of travel restrictions, with lockdowns extending into Q3, possibly due to a second wave of the virus. This would further delay the recovery of air travel. In this case, global RPKs in 2021 could be 34% lower than 2019 levels and 41% below our previous forecast for 2021”. IATA’s Director General has said: “Major stimulus from governments combined with liquidity injections by central banks will boost the economic recovery once the pandemic is under control. But rebuilding passenger confidence will take longer. And even then, individual and corporate travelers are likely to carefully manage travel spend and stay closer to home,”
The impact on long-haul travel will obviously be longer lasting, and one can expect more consolidation between airlines to maximise utility and capacity; more leasing instead of outright purchase of aircraft; and more concentration on domestic flights. Taking into consideration the vagaries of international trade, global economics and geo-politics, all this will have to be reviewed as soon as possible by the legal and regulatory mechanisms that could drum up some sense of regularity, at least until the global economy and international trade pick up. Competition rules will have to be revisited to accord with a level playing field. Above all, the interests of the travelling public must be considered paramount in any equation that might be put forward.
Dr. Abeyratne is a Senior Associate at Aviation Strategies International and former Senior Air Transport Coordinator and Senior Legal Officer at the International Civil Aviation Organization. He teaches aviation law and policy in the graduate programme of McGill University.
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