Airports Council International (ACI) World has published its twelfth quarterly assessment analyzing the impact of the COVID-19 pandemic, its effects on airports, and the path to recovery.
With the removal of travel restrictions and quarantine requirements for vaccinated travellers in 2022, there has been an upsurge in demand across many markets. Global passenger traffic finished the year at 72% of 2019 levels. Market segments vary markedly – international passenger numbers were at 60% of 2019 levels whereas domestic was at 79% in 2022.
The macroeconomy and aviation
As the COVID-19 pandemic shaped many near-term policy decisions over the last three years, the global economy faces an array of challenges in 2023. From the ongoing conflict in Ukraine to a looming economic slowdown in many major economies, there are risks that threaten to disrupt the pace of the recovery from the pandemic.
The most obvious manifestation of such risks is the significant increase in inflation across many economies. The interplay between geopolitical conflicts and rising prices remains a top economic threat to the global economy.
Many analysts suggest that the inflation rate has already peaked and will subside in 2023, facilitated by aggressive monetary tightening by central banks. While higher interest rates help to cool aggregate demand and ensure price stability, it may induce an economic slowdown.
Aviation is very much linked to such macroeconomic factors – like any other good or service, the impact of prices and disposable income remain important determinants of air transport demand. Thus, uncertainty regarding a swift recovery of the aviation industry remains omnipresent, especially in the near term.
The speed of the recovery for 2023 and beyond still depends on several factors with a number of market pendulums moving in opposite directions, thus creating a level of uncertainty. On the one hand, the possible slowing in Gross Domestic Product (GDP) growth in major economies coupled with the rise in airfares due to higher jet fuel prices weigh negatively on demand, representing a downside risk for the industry in 2023. This could dampen or delay the recovery from the COVID-19 pandemic and reaching 2019 passenger traffic volumes. On the other hand, a strong labour market and the re-opening of China, the second largest aviation market after the United States, represents an important boost to global passenger traffic.
Even with the ongoing presence of COVID-19 variants and the recent imposition of travel restrictions and testing requirements by several countries on travellers departing China, the re-opening of its borders represents an overall gain, both domestically within the Chinese aviation market and for international travel.
Chart 1. Medium-term global passenger traffic projection (indexed, 2019 = 100)
Source: ACI World
Outlook for 2023 and beyond
Global passenger traffic is forecast to reach 92% of 2019 levels in 2023. Although demand for leisure travel will likely remain strong in the first half of 2023, growth levels may be more subdued in the latter half of 2023 as the effects of higher interest rates are felt across economies. COVID-19 surges and its variants continue to pose a challenge for seamless international travel, especially amidst knee-jerk reactions by a number of governments. This was especially apparent with the recent resurrection of testing requirements for travellers from China. Despite a number of headwinds, the opening up of Chinese aviation markets represents a positive shift in the path to recovery. The baseline projections for global passenger traffic indicate that the industry will recover to 2019 levels by 2024. Even with the huge surge in international travel, the recovery of the sector to pre-COVID-19 levels continues to be driven mainly by domestic travel, which is projected to recover to 2019 levels earlier than international passenger numbers. International travel is forecast to recover by 2025.
From a regional perspective, recovery patterns remain uneven into 2023. Africa, with continued reliance on international travel, continues to be vulnerable to external shocks. That said, a recovery is still expected by 2024 for the continent. The Asia-Pacific markets continue to make a comeback especially with the opening of China, although the re-imposition of travel restrictions may represent a near-term challenge. While the region continues to see the largest surge in travel with the late removal of restrictions, it lags other markets in terms of reaching 2019 volumes.
The conflict in Ukraine is unlikely to end in 2023 and the economic impacts on air transport will continue to be felt not only in European markets but also globally. Hubs in Southeast Europe and the Middle East have already experienced the substitution effect resulting from the impact of closed airspace and flight bans with Russia in 2022. With the loss of connectivity in parts of Europe on certain routes, the diversion towards these hubs has in turn boosted international traffic numbers in these other regions.
The Americas is home to several markets with passenger numbers reaching 2019 levels for a full recovery. In fact, the sizable markets of Mexico and Colombia have already surpassed 2019 traffic numbers. On the whole, despite the prospect of a recession later in the year, North American markets are expected to come close to 2019 traffic numbers by the end of 2023, whereas markets in Latin America and the Caribbean have a good chance at surpassing 2019 levels in 2023.
Some of the near-term risks in 2023, both upside and downside, are analyzed below.
Low unemployment rates in major economies
Unemployment rates remain historically low, which supports demand for air travel. Low levels of unemployment in the broader population and rising real incomes increase the propensity to travel. OECD countries observed an overall unemployment rate of 4.9% in December 2022, among the lowest on record.
However, some analysts argue that this may be short lived as central banks continue to tame inflation with higher interest rates, thereby contracting economies.
Strong traveller sentiment
The surge in travel following the lifting of restrictions in 2022 continues to spill over into 2023. The combination of low unemployment rates, accumulated savings by consumers during the pandemic, vacation deprivation felt by many leisure travellers, and the desire to reconnect with families, friends and/or colleagues continue to support the recovery. Although some analysts observe that the demand surge will be transitory, traveller sentiment was strong in the last quarters of 2022. The recent Airport Service Quality (ASQ) Global Traveller Survey, covering 4,125 respondents across 30 countries, revealed that 86% of respondents plan to travel by air in 2023. This is the highest intention to travel score since the beginning of the pandemic. That said, as macroeconomic factors take hold, a change in traveller sentiment may be observed in 2023, in line with an overall weakening of consumer confidence.
Re-opening of China
Being among the largest outbound travel market in 2019, the re-opening of Chinese borders represents a major milestone in terms of the recovery of global airport passenger traffic. China has historically been the largest contributor to global passenger traffic growth prior to the pandemic. From 2009 to 2019, China contributed a 15.7% share to global growth out of all countries across the globe. Inbound and outbound international passenger traffic represented 4.4% of global traffic and 16.3% of Asia-Pacific in 2019. Even with the recent surge in COVID-19 cases, and the recent imposition of test requirements for passengers travelling between China and dozens of countries, the weighting of this market plays an important role in the global recovery.
Inflation and interest rates
Among the G20 countries, inflation soared at some of the highest levels in decades reaching over 9% in the later months of 2022 for the group of countries. To ensure price stability and tame aggregate demand from additional inflationary pressures, there is an ongoing and systematic tightening of global monetary policy. According to Reuters, central banks overseeing the ten most traded currencies globally delivered 2,700 basis points of tightening in 54 rate hikes in 2022. These aggressive moves will take time to cool off economies and dampen economic activity – there is typically between a 12- and 24-month lag between interest rate hikes and the resultant impact across economies. Many analysts suggest that the inflation rate has already peaked and will subside in 2023 based on the monetary tightening measures.
Jet fuel prices and air fares
Even with the downward trend on jet fuel prices in the last quarter of 2022, jet fuel prices remain high as compared to previous years. Industry indices of air fares also show the significant percentage increases of double-digit proportions in 2022 as compared to previous years. The drivers of the increases in air fares is largely a function of rises in the major cost items such as jet fuel and personnel costs. With a potential economic slowdown, prices are expected to ease and stabilize.
Geopolitical conflicts and slowing economies
The conflict between Russia and Ukraine further weakened the global economy, disrupting trade and driving a slowdown in 2022. It not only elicited a rise in energy prices affecting the cost of travel but also triggered a humanitarian crisis resulting in refugees and a global food crisis.
The International Monetary Fund (IMF) estimated growth of 3.4% in 2022 for the world’s real GDP. Subdued global GDP growth is expected in 2023 at 2.9% with weakness felt primarily across advanced economies (1.2%). Euro area economies are particularly vulnerable in the current context, and this will show up in weakened output. Emerging Market and Developing Economies are forecast to have higher levels of economic growth at 4%.
Consumer and business confidence
Despite a strong labour market, consumers are becoming more pessimistic in their views regarding the economy. The OECD’s Consumer Confidence Index provides insights into future developments of households’ consumption and saving, based upon answers regarding their expected financial situation, their sentiment about the general economic situation, unemployment, and capability of savings. Any value below 100 for the index signals a pessimistic attitude towards the economy. In the later months of 2022, it was the lowest it has been in years at 96. Similarly, the Business Confidence Index is based on opinion surveys regarding developments in production, orders, and stocks of finished goods in the industry sector. Used to anticipate turning points in economic activity, the latest index shows a downward trend below 100 with a value of 98.
Trade and supply chains
The Purchasing Manager Index (PMI) is based on IHS Markit and JPMorgan Chase’s snapshot of the health of manufacturing across the world and captures market conditions, through the lens of purchasing managers as they invest in inventories to meet future demand. A value above 50 for the index shows expansion whereas a value below signifies a contraction. The latest results in early 2023 show a value just slightly below 50. Linked to this is trade and the demand for air cargo volumes, which provide insights into new export orders by air, especially for high value-added goods. Air cargo volumes continues to soften following its surge amidst 2021 in tandem with strong e-commerce sales. In 2022, air cargo volumes were 97% of 2019 levels falling from the previous year – volumes are expected to slow further in 2023 to 93% of 2019 volumes.
Based on the points above, the 2023 projections are as follows:
- For the full-year 2022, global passenger traffic is expected to be 6.6 billion, which is 71.7% of 2019 levels, improved from the last year’s traffic of 4.6 billion or 50.5% of 2019 levels.
- Even though passenger traffic in the Asia-Pacific region was below the global average, the recovery in the year 2022 was mainly driven by the American regions (Latin America – Caribbean and North America), and travel demand surge in summer mainly observed in Europe.
- The current projection expects the full recovery to 2019 levels at the global level to be in year 2024. However, the pessimistic perspective indicates that the recovery can be delayed to the year 2026 due to macroeconomic risks.
Chart 2: Regional passenger traffic forecast 2019-2027 (indexed, 2019 Level = 100%)
Source: ACI World
- The passenger traffic in Africa has shown recovery from 114.8 million (50.1% of 2019 level) in 2021, to 178.6 million in 2022 (77.9% of 2019 level).
- Africa is expected to keep the recovery trend in the year 2023 – with around 94.0% of 2019 levels – and onwards, making a full recovery to 2019 levels in the year 2024.
- While the Asia-Pacific region showed resilient passenger traffic in the year 2020 with 46.4% of the 2019 level, in the year 2021, the traffic in Asia-Pacific has further declined to 44.6% of the 2019 level, due to travel restrictions in the region. Due to the same reason, in the year 2022, passenger traffic in Asia-Pacific is expected to mark 1.7 billion, or 51.4% of the 2019 level, which is below the global average.
- With the recent easing of travel restrictions in the region, it is expected that the Asia-Pacific region will recover significantly in the year 2023 and onwards. Full-year recovery to 2019 levels is expected by the end of 2024 from the current projection.
- While Europe showed a significant surge in passenger traffic during the Q2 and Q3 2022, the traffic has notably decreased in Q4, slowing down the recovery. This resulted in Europe recording 1.9 billion passengers (77.3% of 2019 level) in 2022.
- Due to economic risks in the region, it is expected that the recovery will be significantly challenged in Europe, with the full recovery expected in the year 2025 or later.
- The Latin America-Caribbean region had the strongest recovery trend in the year 2022, with 624.4 million passengers (90.9% of 2019 level). Some countries indicate that their market have already surpassed the 2019 level.
- The current projection expects that the Latin America-Caribbean market might continue its recovery trend, reaching 2019 levels in late 2023.
- While the Middle East was the most impacted region in the year 2021 with 169.2 million passengers (41.6% of 2019 level), the recovery in the region was visible, reaching to 316.8 million (77.9% of 2019 level), showing the highest yearly growth rate among regions in the year 2022.
- In contrast to the European markets, it is projected that the Middle East could continue recovering in the year 2023, along with the recovery in Asia-Pacific. Full-year recovery for the region is expected in 2024.
- North America has continued its recovery trend, marking 1.8 billion passengers (88.1% of 2019 level) in 2022, from 1.3 billion passengers (66.2% of 2019 level) in 2021.
- However, it is expected that the recovery in the region may slow down due to economic risks, with expected full-year recovery in the year 2024.
Chart 3: Medium-term global passenger traffic by type (in billion passengers)
Source: ACI World