Asia's financial crisis is now threatening to start another global airline recession.
What goes up must come down. Of all people, participants in the aviation business should understand this most basic phenomenon. After all, the one certainty of every flight is that gravity will bring it down eventually. All that the operator of the aircraft has to do is ensure that the arrival takes place in a controlled manner.
In many respects, economics work in a similar way, but gravity is replaced by a much more fickle, but no less powerful force: confidence. It has often been stated that stock and currency markets are dominated by the twin forces of greed and fear. But it is confidence - or lack of it - which determines which of these forces is in charge at a particular moment.
Confidence is a peculiarly human phenomenon. It is completely unscientific, and is based upon perceptions rather than realities. Perceptions are affected strongly by real experience, and by people communicating with each other.
Take stock markets. It only takes one expert to suggest that a stock is under-valued for a few recipients of his wisdom to begin buying. That starts the price rising, and attracts more buyers. Before long there is a rush to buy and the price sky-rockets. Once the stock has become over-valued, the negative whispers start and selling begins, bringing the price down again.
This is all very well when we are talking about a single stock. But recently, countries have been battered by rises and falls in confidence. When this happens, the damage becomes serious.
The economic malaise which is now gripping Asia is a startling example of how changes in confidence can wreak havoc. Only a year ago, everything in Asia's economic garden was rosy. Confidence was boosted by many factors. Apart from Japan, there had been years of strong economic growth. People were richer than they had ever been. Eminent economists predicted an endless succession of years in which growth would continue at above-average rates. Exports and corporate earnings were at record levels. Massive infrastructure projects were under way. Everything seemed possible.
What went wrong? Economists will be debating that question for some time, but essentially the bubble burst. Years of growth had been built on a fragile foundation of massive foreign debt, while the economic, business and political infrastructure was much weaker than most people had realised. People were given jobs because of their links with ruling families, rather than their ability. Loans were advanced as favours rather than based on proper business sense. Afraid of their superiors, nobody asked the awkward questions which should have been raised. A lack of financial transparency, often combined with obscure accounting practices, meant that there was only a dim understanding of what was really going on.
The result has been stunning. Massive currency devaluations have been followed by International Monetary Fund rescue packages and a swift loss of confidence. As the airlines have found out to their cost, all of a sudden nobody has any spare money for air travel, and several carriers face problems servicing loans which their currency devaluations have suddenly made massively expensive. The inevitable results include layoffs, withdrawals from routes, aircraft order deferrals and cancellations, and sale and leaseback transactions.
The knock-on effects will reverberate around the globe. New aircraft which had been destined for Asian carriers will be channelled elsewhere. Non-Asian carriers will reduce their Asian exposure and transfer capacity out of the region. Expect a boost in capacity on the North Atlantic, where the majors are already aggressively working to consolidate their grand alliances.
In a cruel twist of fate, this period of doubt is coinciding with the biggest ramp-up in aircraft production ever. It is a further irony that the withdrawal of Japanese banks from aircraft finance, and the demise of the Japanese leveraged lease, means that aircraft finance is likely to become more expensive.
What happens when higher capacity combines with weaker demand? Look back to the recession in the early 1990s, and you see fare wars, declining yields and load factors, and severe financial losses. There is a difference this time around. Many governments will be unable to rescue their ailing airlines, as they have to meet strict budgetary criteria set by European Monetary Union and, in Asia, the IMF.
There is clearly a risk that the misery of the early 1990s will be repeated. Taking some prudent actions immediately will help to soften the blow. Every airline must carefully re-examine its growth plans for the next couple of years, including routes and aircraft orders, and it is vital to keep the pressure on to cut costs.
There is clearly a risk that the misery of the early 1990s will be repeated. Taking some prudent actions immediately will help to soften the blow. Every airline must carefully re-examine its growth plans for the next couple of years, including routes and aircraft orders, and it is vital to keep the pressure on to cut costs.
Source: Airline Business
