Global Pandemic: Where has demand gone?

As Covid-19 ravaged the global economy airlines were among – or were – the hardest hit victims of Coronavirus. As 2020 is nearing its end, multiple vaccines are promising to offer new horizons from as early as Easter 2021.

The media and trade media have been full of predictions of when normality may return to aviation with forecasts ranging from 2022 to the end of the decade. At Aviation Elevated we are keen not only on finding out when demand will return but how and at what rate. Will we see passenger numbers return at a steady rate? Will airlines have to sacrifice yield in the short run?

These are legitimate questions and without knowing why demand has disappeared this year, we won’t know the answer to.

As the value of historic data for airlines plunges to historic depths, alongside their stocks this year, this historic data does serve one excellent purpose in this crazy year. To identify the causes behind the decline in passenger numbers this year.

We ran a model over the last 4 decades to quantify the impact externalities have on demand for aviation, such as the economy, fuel price, etc. We also took the localised impact of SARS in the far east in 2003 to use as the closest thing to a reasonably accurate proxy for fear of flying. The graph below is to illustrate the closeness of our model to actual numbers.

Model vs. Actuals
Model accuracy: predictions vs. actual historic passenger numbers. Sources: IATA, World Bank, Aviation Elevated Internal

We then took a look at where passenger numbers should have been this year under a normal scenario according to our model and where the actual numbers were. The point of our exercise was to allocate that gap to our external factors in order to identify what had turned people away from flying.

Model results
Model results for 2020. *: IATA’s November full year estimate for 2020. Sources: IATA, World Bank, Aviation Elevated Internal

According to our model the downturn in economic productivity is not a major driver behind the decline. Fear of flying led to a considerable circa 20% of decline in passenger numbers. Which left us with a gap that was 30% of traffic in 2019 – for lack of better words we used “unaccounted”

The model vs. reality:

Economic impact:

Let’s put context around the numbers. Due to the nature of previous economic downturns, by which we mean, we’ve never seen a global pause of economic activity, the model does to some degree probably under estimate the economic slowdown has had on aviation, however the 3% is probably a good indication, in the interest of preserving proportionalities.

Fear of Flying:

South-East Asia especially Hong-Kong saw a huge dip in demand as a result of SARS. Out of the economies of the time Hong Kong’s was the closest in its nature of trade and structural build up to the Western world today, which is why we decided to use Hong Kong as a fear of flying proxy.

Today, fear of flying may eat somewhat more into the “unaccounted” portion, however much with our variable above, we believe it is a reasonable indication of the drivers behind our passenger decline have been.


This portion represents circa 40% of 2019 passenger numbers. We believe most of this part can be explained by travel restrictions such as border closures and quarantines put in place, making all but essential and very long leisure trips almost entirely unfeasible for most people.

This portion will inevitably to some extent include a minor portion of the previous two segment, however based on the statistical relevance of our model we are more than confident the results offer a strong representation of why demand has dried up.

What could this mean for our recovery?

Let’s take a look at each aforementioned “gaps” individually and what they mean for recovery. The economic impact is relatively straight forward, GDP is directly correlated with demand for aviation. As such, this portion of demand (or lack thereof) can be stimulated by lower ticket prices and is a portion of the traveling public that responds well to financial incentives relating to travel.

For the traveling public this would be welcome news, considering flying and holidays could be cheaper during our recovery phase.

However, if we take a look at the percentage of demand, which has disappeared due to fear of flying, all of a sudden the picture changes. If people are reluctant to fly because of health concerns, financial incentives won’t work and instead airlines will have to prove the overall safety of flying, before passengers consider reembarking on their journeys.

From a “how recovery will” occur point of view, this means that the investment required to actually make flying COVID safe and message this to customers won’t come cheap to airlines. The “good news” for the airlines is that this segment of traffic is effectively price inelastic at the moment so they wouldn’t travel at lower prices anyway. The question however remains around their willingness to pay extra for their travels.

Finally, our “unaccounted” segment. The most plausible scenario is that this segment of passengers is a mix of people who would be traveling regardless of the pandemic and some who wouldn’t. If we trust our SARS proxy’s accuracy then most of this segment would have travelled, would it not have been for travel restrictions.

While we do not know the answer to the following question as we are not medical professionals, our results from an economics perspective do raise the question of the cost and effectiveness of travel restrictions once community transmission is already present in a country.

However, for recovery this is good news in the sense that this segment could likely respond well to price stimulation in the short run and will likely normalise the quickest in a Covid-19 restriction free world.

To summarise

The fact that most developed countries have incurred vast debts to keep their economies afloat and the damage minimal, has meant that household disposable income hasn’t evaporated altogether, rather it has been tied up due to uncertainties. While the double digit shrinkage of economies is certainly not good news for an industry so heavily reliant on international trade and cooperation, the willingness for people to travel after having been locked up for a year or so will certainly return.

The timing and the extent of the return of high yield business passengers is perhaps much more so at question. If we consider the 2008 financial crisis we were convinced that business travel would take a substantial long-lasting hit. The impact on business travel from 2008 was felt for a much shorter period of time than many people had predicted. However this a different crisis, with much more profound underlying causes.

Airlines will face a knife edge balance for their recovery. It won’t be back to normal for years to come due to the long-lasting financial burden airlines will be under. The vast debts incurred by airlines will accelerate consolidation in every market, in order to cut unit costs and increase yield to the highest sustainable levels in order for their continued survival in our post Covid world.


Cover photo credit: Anna Shvets from Pexels.

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