Airlines braced for grim winter as slowdown threatens recovery

Airlines are braced for a grim winter after struggling under the weight of booming demand for travel in the summer as the economic slowdown threatens their recovery from the pandemic.

The dire outlook has prompted warnings that passenger numbers could fall as household disposable incomes come under pressure from high inflation and soaring energy bills.

Despite upgrading its passenger forecasts, London’s Gatwick said the uncertainty on the economy was a big threat to an industry already shaken by rising fuel costs and staff shortages.

“It could impact the overall propensity for travel,” said Jim Butler, Gatwick’s chief financial officer.

Although airlines have not reported a significant hit to bookings, he stressed he was “cautious about what we might see in the winter or next year”.

While it might not affect many people’s ability to take a big annual holiday, Butler said, it could weigh on demand for “the second or third trip”.

One senior European airline executive said the “outlook is still very uncertain” for the winter, particularly as the end of the summer is never a strong booking period.

He expected less demand for leisure travel in the fourth quarter, including a reduction in shorter city breaks.

Instead, he expects bookings to cluster around typically busy periods, such as school half-term holidays and Christmas.

It would mean a further blow to airlines and their share prices, which have been under pressure even as demand surged over the summer with airports and carriers struggling to cope with a flood of bookings.

The MSCI index of European airline shares has lost 15 per cent this year, with major airline groups including British Airways owner IAG, Ryanair and Air France-KLM down about 30 per cent.

“There is a lot of negativity on airline stocks . . . people are saying you don’t usually buy airlines into a recession,” said Stephen Furlong, an analyst at Davy.

The revenue of the seven airlines covered by credit rating agency Moody’s in 2009 declined by about 20 per cent in the recession that followed the financial crisis, and operating profit fell by 50 per cent.

But Furlong said the industry is now in an unusual position, with a weakening economic outlook coinciding with pent-up demand for travel that has not shown any signs of slowing down following two years of travel restrictions. No major airline has publicly reported a slowdown in bookings.

“People are hugely worried about the macro, and yet the numbers are really good,” he said.

Bjorn Tore Larsen, the chief executive of new Norwegian long-haul airline Norse Atlantic, said a recession would “of course” hit demand for travel, but that travelling was still “very high on people’s lists”.

“I think many people would go for that weekend away, rather than buy a new TV,” he said in an interview in August.

There is also scope for airlines to recover more of their pre-pandemic business, analysts at Moody’s said in a recent report.

Some countries in Asia, notably China, have moved towards easing the last remaining Covid-era travel restrictions, while corporate travel has still not returned to pre-pandemic levels.

“While ongoing recovery does not make the industry immune to recessionary pressures, we believe that because of these pandemic-related dynamics, the earnings of the industry would not fall nearly to the extent that they did in the last recession,” Moody’s said.