Willie Walsh says the airline industry will never be able to recover all the capacity it lost over the last 15 months due to COVID-19, and that airlines will emerge much smaller than they have been once the pandemic is over.

Walsh replaced Alexandre de Juniac in April as the Director General of the International Air Transport Association (IATA), the airlines’ powerful lobby group.

"It will be a smaller industry. We are not going to recover all the capacity," Walsh said in a pre-recorded online interview with Reuters . He cited the swathes of aircraft retired and employees laid off or placed on furlough. “It will be a more cautious industry. I don't expect to see M&A (merger and acquisition) activity, principally because people will be guarded about the cash they have."

The airlines have been hammered by the pandemic, at one point in April of 2020 carrying just five percent of the passengers it moved in 2019. The industry is still recovering as international and business travel are lagging well behind leisure travel, which is surging. Overall, capacity is back to about 70 percent compared to two years ago.

Walsh, the former chief executive of British Airways' owner IAG, said that spending "valuable cash resources" would be "too risky," but he believes there will be consolidation through airlines shrinking their operations and some failing.

"It's going to take airlines time to repair their balance sheets. Airlines are not going to be able to take the risk of operating unprofitable routes in the short term," he told aviation consultant John Strickland.