Passenger traffic may appear to be moving in line with capacity, but analysts believe that this is the result of low fares rather than natural demand, and that there are still too many seats in the market
The final tally of traffic figures for the world's leading carriers in 2002 confirms what most already knew. Traffic growth has been elusive for the major carriers in the traditional major markets of North America and Europe. Instead, the real opportunity has fallen to fresh players and the less mature markets of Asia-Pacific and the Middle East. And the short-term outlook is for more of the same.
Overall, traffic edged up 2.2% last year according to the latest Airline Business ranking of the top 200 passenger carriers, a survey compiled by sister online data service Air Transport Intelligence which takes in the bulk of the world's flying both scheduled and charter.
And it is clear where that growth came from. Feeling ever more confident of their competitive advantage, the low-cost carriers kept growth rolling in 2002 - almost single-handed, they have kept the mainline aircraft manufacturers from considering other lines of work.
The dozen or so independent low-cost carriers included in the ranking posted a collective traffic growth of around 15%last year and flew approaching 150 million passengers. Admittedly close to half of those come just from Southwest Airlines, which is currently tilting at Delta's title as the largest carrier of domestic passengers in the USA.
On a rough calculation, 8-10% of passenger journeys last year were made on one of the independent low-cost carriers. And that is before factoring in the captive operations launched by the network majors, such as bmi baby, or by the European charter carriers, such as Hapag-Lloyd Express. Those do not generally as yet report separately, but have nevertheless been growing fast over the past year.
The low-cost independents dominate the list of fastest traffic growth in 2002, led by Brazil's Gol with a rise of 150%. JetBlue was not far behind, having doubled traffic last year and even more stunningly accompanied that with a five-point rise in load factor to 83%. Impressive increases also came from Europe's easyJet and Ryanair, as well as Canada's WestJet. Even more mature Southwest logged capacity growth of over 5%. Most importantly, each also kept load factors steady.
Regional carriers too were strongly represented in the growth league, picking up yet more of the service being shed by their struggling and higher-cost mainline partners. SkyWest's traffic soared by over 70%, while Delta's Atlantic Southeast Airlines was up by a third and Comair too doubled after recovering from the 2001 strikes.
Elsewhere in North America, carriers were reining back, with the region ending 2002 marginally down in terms of traffic. Europe's carriers too appear to have been at a virtual standstill.
Instead growth centred on Asia, including a strong showing from China, and the Middle East, where fast-growing Emirates and Qatar Airways were joined by Kuwait Airways and Oman Air in posting sizeable gains.
But latest forecasts from ICAO suggest that any clear world recovery will have to wait. Preliminary figures for scheduled carriers in its member states show traffic growth of only 0.4% last year and ICAO expects traffic to stay almost unchanged this year as the damage done by SARS in Asia offsets some modest stabilisation in North America. Not until 2004 and beyond does it expect the world to regain momentum.
Supply balance
But more important than the headline traffic figures, at least for industry profits, is the balance between supply and underlying market demand. Even the relatively modest growth in traffic last year appears to have been bought at the expense of yields and financial analysts warn of worse to come if and when capacity pours back onto the market.
Chris Avery, at JP Morgan sees a familiar trend developing, especially in Europe. "Most carriers have been pretty good at scaling back capacity, but the moment there is a hint of recovery, they start putting aircraft back in again," he says, pointing to Lufthansa's recent reactivation of grounded aircraft and the hiking of aircraft utilisation by British Airways. Both moves were made in an attempt to garner a greater share of the dramatically shrunken market. "Yield recovery is slower than it should be as everyone continues to chase market share," he says.
On the key transatlantic market Avery believes that balance sheet issues will prevent the outright market share hunt that occurred in years past. However, he warns that the drive to increase aircraft utilisation could nevertheless put new seat capacity onto the market and so prevent the major carriers from regaining pricing power. While it remains a temptation for carriers to add marginal extra frequencies to existing routes, Avery warns that even where these are cash-positive they stand to hinder efforts at getting fares back to a supportable level.
All-important pricing power has also proved elusive to carriers in the Asia-Pacific region. Earlier this year, airlines had grounded whole lines of flying in the face of SARS and its devastating effect on traffic. Now, with the epidemic apparently under control, the capacity has been flooding back, but some worry that it may be running ahead of demand.
Peter Negline, Hong Kong-based airline analyst with JP Morgan, for example, points out that Hong Kong, which was a virtual ghost town during the height of SARS, experienced a 24% increase in the number of daily flights in the second half of July alone. He adds, however, that yield had not followed, pointing that a round-trip ticket on the normally high-yield route between Hong Kong and Taipei was being sold for $250, two nights at a luxury hotel included. Even with this drop in fares, five carriers combine to operate 30 daily widebody departures on the hour-long flight.
In a sign that fares may fall more before they climb again, Negline expects the likely return to schedule normality by non-local carriers to further erode the yield equation. He cites the fact that US carriers have been slowly restoring operations on direct services from Hong Kong as well as several Asian routes served via Tokyo.
In all regions, the continued dearth of business traffic is also taking its toll on yields. The return of the corporate road warrior would compensate for a multitude of problems, but no one has plans for a welcome-back party anytime soon.
While Avery, for instance, is confident that business traffic will return to normal levels, he believes the summer of 2005 will be its earliest time of arrival.
Corporate concern
There are also some key questions over whether the increasingly cost-conscious business travellers will return to the full-service product once conditions improve or is their migration to low-cost service set to become a permanent feature of the landscape? Some network majors, notably led by America West in the USA, have already restructured their pricing models to rely more heavily on leisure fares and less on business demand. In Europe, Aer Lingus too has led the way in slashing away at prices and frills.
For his part, Avery says that there will still be a recognised need for premium-class products, but that the biggest change from previous, loose-spending eras may well be seen in the European sector. He predicts that the days of travellers regularly shelling out $1,000 for a London-Paris business class ticket may well be consigned to history.
In Asia, Negline says that the current fare environment is marked by unusually high price elasticity of demand, with corporations seeking more value for money than at any time in the recent past. However, he expects this will change when overall business confidence improves, noting that the distances are so much greater in Asia that a premium class ticket represents greater value than in other regions.
Source: Airline Business
