Concerted action by the world's economic policy makers appears to have paid off. The threat of global recession that loomed during the crises of 1998 seems to have subsided, at least for the time being. But it may only be a temporary calm, with many pitfalls still ahead for the world economy and for the airline traffic which shadows its growth.
As 1998 came to a close, forecasts for growth in most of the major industrial economies, North America and Europe included, were again being pared back. Japan remains deeply entrenched in recession and the major economic forecasters see few prospect of a full recovery there until 2000 at the earliest. In the emerging markets of Asia it is possible that the worst has passed, but until confidence recovers in Japan, the growth opportunities remain limited. In Russia, the long economic nightmare continues, as does its wider economic fall-out, which has been felt as far afield as South America. In Brazil, the region's most significant economy, recession now looks inevitable.
Even without full-blown recession, the world's airlines can expect to feel the impact of this slowdown in the world economy. On a rough measure, every 1% fall in economic growth costs the industry some 20% in sales revenue. But while airlines may have to live with lower yields and slimmer margins, the outlook is not necessarily disastrous. Many of the pressures which resulted in the spectacular airline losses of the last downturn will be absent this time around.
Significantly, the world is currently going through a low inflationary period. Estimates for inflation in the main industrial countries over the coming year is being put at just 2.6% by the Paris-based Organisation for Economic Cooperation and Development (OECD). Therefore, the level of interest rates, which did so much damage to the heavily indebted carriers in the early 1990s, will remain low. The consensus is for rates to stay around the 3-5% mark across the USA and Europe. Carriers that have borrowed should suffer less, and those that need to borrow in the wake of revenue shortfalls, will not be crippled by soaring interest rates.
Also, despite the best efforts of the oil producing countries within OPEC, there is little prospect of a rise in oil prices, thanks to suppressed demand from the industrialised and emerging market economies. It is worth noting that, at the start of 1999, oil prices and airline fuel costs are some 30% below where they were two years ago. The continued firmness of the US dollar will carry mixed blessings, however, raising aircraft and fuel costs but helping yields.
Slowdown not depressionThe forecast for the coming year and beyond, as seen by the OECD in its last Economic Outlook, published at the end of 1998, confirms the view that a slowdown, not a full blown recession, is likely. In the major US market, growth is finally expected to fall from the heady 3-4% of the past couple of years, to average a more modest 2%. US stock markets will be worth watching though. Much of the nation's wealth is now tied up in Wall Street and if last year's late rally should disappear, that could yet trigger a rapid downward spiral in consumer confidence, pushing the USA and much of the West into recession.
The main economic interest in Europe is the launch of the new euro currency and the European Central Bank. However, the economic background to the new currency has deteriorated markedly. Healthy economic growth in the Europe over the past couple of years, which helped prop up some double-digit air traffic figures, is now expected to dip. Signs of slowdown in Germany have started to emerge and there are also concerns on the financial markets that a series of new governments with socialist backgrounds could lead to a retreat from the tight fiscal discplines and labour market reforms of their predecessors. For the region's airlines that uncertainty could result in considerably lower levels of premium business traffic and a dent in cargo this year.
While decline for the US and European economies is expected to be a relatively mild experience, Japan appears to be in longer term difficulty. Efforts to cure the country's economic ills, the reform of the banking system and the latest huge expansion package - worth an astonishing $120 billion - have not convinced the OECD that Japan can lift itself out of its current stagnation. Despite optimism among the Japanese carriers that the economy may begin to pick up mid-year, the OECD is not enthusiastic. It sees fragility for some years to come. If true, then Japan will have had five years of lost growth and falling living standards with the accompanying loss of consumer confidence. That will translate into problems with demand across the region.
Elsewhere in Asia, the most serious potential problem identified by the OECD would be a collapse of the dollar link in Hong Kong and China, which has so far survived the assaults of speculators in 1998. If the link remains intact and the progress in clearing up the economies of South Korea and Thailand continues, there could be some slight resumption of growth this year. However, progress will be hampered by Japan's restructuring. The OECD's biggest fear is that a devaluation in China could trigger another bout of contagion, which would see foreign funds fleeing all emerging markets.
The last big policy step taken by the West in 1998 was the rescue plan for the Brazilian economy. The scheme, involving most western economies, has already halted the export of capital abroad after $30 billion left in the second half of the year. However, the consequences of the $41 billion IMF package is that Brazil will be forced into recession in the first half of 1999, slowing output across the whole Latin American region. There will, however, remain some bright spots. Mexico, which got through its crisis in 1994-5, is reasonably healthy and output is forecast to expand. But it may prove an exception in the region.
In addition to regional difficulties, the OECD is seriously concerned about the "millennium bug" which could get the year 2000 off to a difficult economic start. The cost of correcting communications networks, industry control systems, consumer electronic devices and safety systems could be as high as $300-600 billion worldwide, suppressing demand and increasing the odds of a global recession, particularly if there are systems failures.
Overall the period 1999-2000 looks as if it will be one of retrenchment for the global airline industry, although there may be limited areas for investment and growth in those parts of Asia and Latin America which are now over the worst.
Source: Airline Business
