Although it may not have felt that way, the industry may already have seen the best of the economic upturn, writes Chris Tarry
There is a general mood that, after the pain of the past few years, the industry is now well placed for the upturn. Without wishing to dent reviving industry optimism, it is worth asking whether that upturn is, in fact, going to materialise and if so where and when?
On present standings it seems reasonably clear that the economic outlook in most parts of the world is not as favourable as it was a year ago. Furthermore, it looks increasingly likely that 2004 will emerge as a peak year for economic growth, at least in the near term. Growth of economies in what the International Monetary Fund (IMF) styles the "developed world" is expected to be lower this year than last, with, at best, a slight rise again in 2006.
Economists continue to debate the reasons for the slow down. The lagged effect of soaring oil prices as they feed into the economy is one candidate, although at this stage it is difficult to gauge its true impact. Yet one thing is clear and that is the economic outlook is deteriorating.
For many airlines across the world, reducing cost has been the top priority. But while this has been necessary to ensure short-term survival it is not, on its own, sufficient to achieve a sustained future growth in profitability. For that to happen, revenues need to grow too.
Although economic activity is not the only driver of airline traffic growth – with the significance of price gaining in influence – the rate of increase of GDP is still the single most important factor for revenues. Of course, the self-styled low-cost carriers will argue that they are immune from the vagaries of the economic cycle, but the extent to which this holds true depends upon their ability to keep growth rolling by opening new routes. For the so-called legacy carriers, with more or less steady-state networks, growth depends more upon the economy.
In broad terms, airline traffic is generally still assumed to rise at roughly twice the rate of underlying GDP growth (adjusted for inflation), whereas airline revenues appear to be growing more or less at the same rate as nominal GDP growth (as reported without adjusting for inflation).
Applying these rules of thumb to the latest IMF data, there are some interesting and potentially worrying outcomes, at least for the developed world, where growth is slower, but which represent the main focus for the majority of the world's largest network majors.
In its World Economic Outlook for April 2005, the IMF designates 29 countries as comprising the "developed "nations. These range from Australia, Japan and Singapore to the USA via western Europe. Applying the rule-of-thumb relationships between GDP and air traffic growth to this data is very revealing. So what of the outcomes?
In a majority of the countries, including USA, Finland, Hong Kong, Ireland, Japan and Singapore, the analysis suggests that airline revenue might grow more slowly than traffic in both 2005 and 2006. In five nations, including Australia and Germany, revenue would grow at the same or a higher pace than traffic in 2005, but stay the same or lower in 2006. In Greece, Italy, Portugal and Spain, revenue was the same or higher than traffic growth in both years. Finally, in Iceland and the UK, revenue growth was lower than traffic growth in 2005 but equal or greater than it was in 2006
The most immediate conclusion from this admittedly high-level analysis is that the outlook for the airlines in this part of the world remains tough. More significantly, for most it suggests that growth in revenue is likely to be at a slower rate than that of traffic, which by definition suggests that yields have further to fall. Perhaps the only realistic conclusion is that for the airlines in this group of countries it is necessary to run very fast to even stand still. As carriers warn of cost head winds – and it is true that the changes in the fuel price remain the big swing factor in near-term airline profitability – the industry needs to consider revenue head winds too. Given the current range of economic forecasts these are likely to get stronger rather than weaker.
Source: Airline Business
