In the latest of a series of articles analysing the traffic outlook around the world, Chris Tarry of the CTAIRA consultancy examines the European market.
Europe's air market continues to run at two speeds. While the low-fares sector, led by easyJet and Ryanair, is racing ahead, the traditional flag carriers, for the main part, continue to retrench - last year turning in traffic figures close to those last seen in 1999. While passenger volumes will eventually return, the big question is the nature of the revenues that they will bring with them.
In the past, we have focused on economic outlook as the underlying driver of traffic. So, a key indicator is to look at traffic growth as a multiple of GDP growth. However, that multiple is not a constant. For any given rate of economic activity, a permanent downward shift in the price structure will increase the apparent multiplier. Just such a structural change would appear to be taking place in Europe.
With the new entrant airlines reporting traffic growth of 25-30% again in 2002, they would appear to have a multiplier of more than 20 times the prevailing rate of GDP growth in the European Union (EU) area. At the same time, members of the Association of European Airlines (AEA), which are predominantly the national flag carriers, reported a fall of some 4.6%. That fall was against a background where GDP increased, albeit modestly, by just over 1%.
However, it is perhaps more reasonable to consider the 1995-2000 timeframe - a more normal period and one for which there is consistent traffic data. As a whole, the AEA airlines reported growth at an average rate of 3.2 times GDP and slightly less on intra-European routes, where low-cost competition is taking hold.
Not all the majors have had a similar experience. The multiplier for British Airways averaged 2.4 over the same period, although its traffic grew below GDP in both1999 and 2000 as it slammed on the brakes. By contrast, the average for Lufthansa was 3.3, within a range of 1.6-5.0.
But in general, it is clear that the multiplier has been overinflated as an effect of price stimulation in the market. The question is at what level should the multiplier sit in order for traffic growth to be driven by economic activity rather than price? Intuitively it feels that the level should perhaps be between only half or two thirds of the reported multiple.
Over the medium term, it is possible that the multiplier may rise as new entrants spread into fresh European markets and the incumbents respond. However, that depends on the nature of the expansion. If low-cost traffic comes from new markets previously inaccessible to the incumbents, then the GDP multiplier should grow. If it comes from substitution of existing services, then that would tend to represent a zero sum game.
Over the longer term, market maturity should anyway tend to reduce the base multiplier. It is true that the mature transatlantic market did exhibit an average multiplier of 3.5 for the AEA airlines over 1995-2000, but this was also a period during which an unprecedented level of discounting took place over the Atlantic as capacity destined for Asia was re-deployed. In short, the traffic growth was bought at the expense of yields.
In more normal times, at least, the external value of the dollar has also had a measurable impact on leisure traffic. For Asian routes, the reported GDP multiplier for the AEA airlines for the early part of the 1995-2000 period was similar to that of the other market areas in the order of 3.8. But as foreign exchange rates swung, it slimmed to just 0.9-1.5 during 1998-2000.
What then of the future? Forecasts from the International Monetary Fund in September's World Economic Outlook suggested that real economic growth in the EUwould be some 2.3% in 2003 or twice the estimated outturn for 2002. There is, however, plenty of evidence of increasing economic fragility in Europe as consumer confidence declines. That will itself have a direct effect on air travel as expenditure on discretionary goods and services falls further.
Furthermore, the high price of oil may also feed through to slow economic activity. Against all the current uncertainty, some may regard it as futile to make forecasts as they are more likely to be wrong than right. The speed of change is already evident and possibly due to accelerate. Indeed for a number of European airlines, figures at the start of 2003 made it look as though the Gulf war had already broken out.
Source: Airline Business
