Jet fuel demand holds clues to world economy’s health

Sunbd Desk , Published: 2021-02-02 14:46:21, Updated: 2021-02-02 14:46:21

The long-awaited global economic recovery is awaiting take-off — in a literal as well as a figurative sense. All the experts, from august institutions like the IMF down to the smallest of small and medium-sized enterprises, are agreed that 2021 will see a significant recovery from the lockdown recessions of last year. But one factor above all others is still casting a shadow over the pace and strength of that turnaround: the global aviation business.

Fewer passengers traveling for business or for leisure has a direct effect on the global economy. Less air cargo flying around the world directly impacts world trade and business activity. Some 90 million people were employed in aviation around the world in 2019, and the sector comprised nearly 5 percent of the global economic growth, according to figures from trade organizations.

If global aviation was a country, it would have a GDP of $3.5 trillion, and would be as big as the Netherlands.

But that was before the pandemic effectively stopped the world flying in the spring of 2020. Ranjith Raja, oil research manager for the Middle East at data provider Refinitiv, told Arab News: “COVID-19 has impacted almost all industries globally, but the airline industry has been one of the worst hit sectors. With rising skepticism surrounding traveling and global lockdowns, the passenger industry came close to a standstill at one point.”

For the Middle East, the aviation-business collapse has been a double whammy. Airlines like Emirates and Qatar Airways are super-connectors in a global economy that has become increasingly disconnected during the pandemic.

But they and other global airlines are also big consumers of the region’s most valuable commodity — crude oil, in the form of highly refined jet fuel. In a normal year, aviation would account for nearly 10 per cent of global oil demand. That was reduced dramatically in 2020.

The statistics tell the depressing story. By the end of April, airlines across the world had virtually ceased passenger operations. The aviation industry’s key metric — revenue passenger kilometers (RPKs) or the amount of cash-generating flying going on in the world — crashed by more than 94 per cent — unprecedented since the numbers were first calculated in 1990.

Even a mild recovery over the summer months was deflated by the resurgent second wave of the disease toward the end of the year. By November, global passenger traffic was still nearly halved from the previous year. The result has spelt financial disaster for the aviation industry.

“Financially, 2020 will go down as the worst year in the history of aviation. On an average, every day of this year will add $230 million to industry losses. In total, that is a loss of $84.3 billion. It means that—based on an estimate of 2.2 billion passengers in 2020—airlines would lose $37.54 per passenger,” said Alexandre de Juniac, chief executive of the International Air Transport Association.

In a normal year, aviation would account for nearly 10 per cent of global oil demand. That was reduced dramatically in 2020. (Shutterstock)

To take the example of the Middle East’s biggest airline, Emirates, this has had a dramatic effect. With passenger numbers down by three quarters in the autumn, revenues fell 75 percent in the first half of 2020-21 year, leading to a loss of $3.8 billion for the first time in three decades. The airline had cut at least a quarter of its staff by the midway point of the financial year.

It was able to fall back on its big cash reserves, built up during the good years, as well as the sound financial reputation it has in the international banking community and — not least — the support of the Dubai government, which recognized Emirates’ vital contribution to the economy with a $2 billion injection.

Sheikh Ahmed bin Saeed Al-Maktoum, the chief executive, called the downturn “unprecedented”, but added: “We expect a steep recovery in travel demand once a COVID-19 vaccine is available, and we are readying ourselves to serve that rebound.”

Other airlines are not in Emirates’ favorable cash position. Globally, dozens have gone bankrupt during the pandemic, while all have had to reassess their long-term strategies. A top priority here is to ensure greater fuel efficiency, which in turn means smaller, more economical aircraft using less jet fuel.ArabNews