The constraint shown by Europe's majors appears to be paying dividends, with demand set to outstrip capacity this year. Chris Tarry of Commerzbank raises the forecasts and looks at the frequency issue.
It is often said that the only constant in the airline industry is change and that is certainly true in the delicate balance between supply and demand. At the start of the year, early estimates from the Airline Business and Commerzbank traffic model suggested that the balance could start to come right in 2000 after last year's excesses. As the year progresses the picture keeps getting brighter.
The outlook for the major European airlines is a case in point. Back in January, the calculation was that they would see demand grow by some 6.9% this year on international routes. This figure represents the underlying demand which is driven by fundamental economic growth rather than stimulated by lower fares. Based on early indications from the airlines, it also seemed that capacity growth in 2000 would run well below this figure at only 3.5%. That itself is significant, given that the capacity growth had run ahead of demand by three percentage points in both 1998 and 1999. That fact helped name our model the Traffic Deficiency Indicator (TDI). Perhaps given the latest forecasts the name should change to traffic surplus indicator. But then again, that might be tempting fate.
Since the beginning of this year, there are very real signs of an improvement in the underlying environment. Economic growth in the USA, in particular, has remained strong and there has been a general upgrade in forecasts elsewhere. This is reflected in an upgrade to the forecast for the European majors to an rise in the underlying traffic growth of 8%.
At the same time, there have been a number of further downward adjustments to planned capacity. Most recently KLM stated that for the coming winter timetable it will reduce capacity by some 5%. Overall, the impact of the current capacity plans is to reduce the rate of capacity growth for the European airlines to just 2.6%, well below the forecast levels of demand. Against this background the environment for yields is clearly markedly improved. Indeed, British Airways (BA) posted a 3.2% gain in the December quarter, with a similar trend expected when it next reports.
And the excess demand that will emerge this year is likely to persist. Factoring in the current expectations for economic growth suggests that for the European airlines, the 2001 underlying growth in traffic will be in the region of 7.3% against planned capacity increases of 3-4%.
The forecast comes with the usual cautions. Results are global and relate to the full-year outcomes. They cannot hope to predict monthly variations or to account for the historic overcapacity feeding through the system. Yet the planned capacity figures for the coming summer are revealing for a number of reasons.
Latest scheduled information from OAG for June, the height of the summer season, suggests that capacity will grow by some 5-6% on the major intercontinental routes (see table right). Across the North Atlantic it is lower still at 4.7%. Of course, the transatlantic growth was always likely to slow after last year's bout of excessive and painful expansion. However, there are signs of actual declines in transatlantic capacity. BA and KLM are now joined by Delta Air Lines, Iberia and TWA in offering less capacity across this summer than they did last. Equally interesting is the change in frequency offered. Despite a 2% cut in capacity, BA's frequencies across the North Atlantic are increasing by some 8%.
Focus on frequency
Whilst the picture is a little clouded by the number of codeshares now in place, the fundamental message is that increased frequency is seen as a key to success. That has ever been true on short-haul routes and has become so on some longer-range services such as those linking Europe and the US East Coast. More are likely to join the list as perceptions change. A decade ago, travelling the East Coast route was still viewed as a significant journey. Today, for many travellers, it is a regular trip.
It is, however, on intra-european services that the frequency advantage is potentially at its height. It has long been an interesting question as to how airlines in Europe operating short-haul routes might differentiate what is increasingly becoming a commodity product. For certain it has much more to do with frequency than on-board service.
The June schedules posted with OAG suggest a net rise in frequencies of 7.3% across intra-European markets, this summer. Although that is less than the overall capacity growth, it is important to look behind the aggregate. Out of the top 30 scheduled airlines in Europe, there is an almost even split between those increasing frequency or capacity fastest. However, looking at the top of the list, the frequency camp has some impressive names: BA, Lufthansa, Air France and Swissair are all there.
Source: Airline Business
