Kevin O'Toole/LONDON
IN GERMANY THEY CALL it the pig cycle. When pork prices rise, farmers pile into the market to cash in on the boom, only to find that, as output rises, so prices tumble. Farmers cut back, pull out or go bankrupt. Pig numbers fall and the cycle begins again.
Substitute pigs for aircraft seats and you have a fair description of the cycles which have beset the world airline industry. So, although the recovery is now in full swing, aviation economists have already begun sharpening their pencils ready to forecast when the next downturn will occur. Best bets suggest another dip just after the turn of the century.
Perhaps the more intriguing question is whether the cycle could be more restrained this time round - in short, whether the severity of the last boom-to-bust cycle has taught the airlines an important lesson in caution.
Some clues as to the state of play come from the 40th edition of the World Air Transport Statistics released by the International Air Transport Association (IATA).
The headline news is encouraging enough. After marking the end of recession with a modest net profit in 1994, IATA members netted a more-convincing $5.2 billion in 1995 on their international services.
Even this record return falls short of what most industries would regard as a healthy performance, however. Put in context, the profit represents a net return on sales of around 4%.
The return at corporate level, including all airline group businesses, is an even more dismal 1.6%. Yet the industry has not consistently produced anything better since the 1960s. Thus is born the tantalising hope that, with a bit more work, this could be the start of a new era, although IATA's statisticians concede that it may yet turn out to be no more than the plateau before another downturn.
Whatever happens, it will be at least another year before the industry has wiped out the last of the massive deficit built up during recession, let alone started to lay down firm foundations before the next downturn.
IATA admits that it is hard to predict exactly where profits will go next. The hesitancy shows in the forecast for this year, which suggests a return of anywhere between $4 billion and $8 billion depending on how fast capacity rises and how fast yields fall.
So far, capacity growth has remained relatively controlled. In 1995, passenger traffic grew by around 5%, staying a comfortable point ahead of the growth in seat capacity. As a result, load factors have been hitting record highs - averaging close to 69% on international routes and 65% for domestic services. Whether that can be sustained remains to be seen. Traditional wisdom suggests that load factors must be close to their ceiling, prompting a burst of new capacity. Certainly, the evidence so far this year has been less than promising. Over the first four months - not the peak season -load factors have failed to repeat their record performance.
For a demonstration of how quickly markets can turn sour, the industry need look no further than the freight sector. The international cargo market had sustained growth levels of more than 15% throughout 1994 and new freight capacity was rapidly added as airlines prepared to cash in on the boom.
In fact, growth plummeted and is now bumping along at a sluggish 0-5%. Yields and load factors tumbled. Newly independent Lufthansa Cargo, the world's largest international freight carrier, barely scraped a profit in 1995 and others such as KLM were left nursing embarrassing drops in yields.
Admittedly, the passenger market has shown more orderly growth - IATA expects a steady 6-7% increase on international routes. Anecdotal evidence also suggests that airline managements are more interested in cutting costs and managing yields rather than grabbing market share.
So far, that strategy has been paying dividends. IATA reports that overall yields grew by 3% in 1995, despite the problems in freight. A major boost came from the return of the premium traveller, so elusive during the recession, but now apparently returning to the front of the cabin. Business-class traffic grew by an impressive 12.5% on the North Atlantic (more than twice the figure for economy) and by 15.4% on Europe-Asia routes.
To complete the virtuous equation, costs stayed virtually static. For this year, IATA predicts that yields will fall slightly in real terms, but that costs will edge down too.
More concrete evidence that capacity growth will remain muted comes from the aircraft market. In the heady days of the late 1980s, when the ordering frenzy reached its climax, the jet-airliner backlog stood at close to 4,000. Today it is around half that figure.
True, the backlog is growing again, but slowly. IATA reports that, among its own members the number of aircraft on order actually ended 1995 down by 180 at just over 1,100. It adds that the number of new deliveries scheduled for this year is up by 120 to 389, but, again, the figure is not yet alarming.
If these indicators hold good, then perhaps this time the airline industry may at last be able to iron out some peaks and troughs.
Source: Flight International
