If there were any lingering doubts about the benefits of capacity restraint then they should have been dispelled by the latest figures from the European airline industry. Admittedly, fuel prices caused further pain but the main message coming through for the summer season was one of strong improvement in passenger yields.
This, of course, relates to that fundamental economic law: if you create a situation of excess demand by controlling supply, then the price rises. And so it has in Europe. The increase in seat yields for the June quarter was improved on in the three months to September. This improvement has gone together with the main players taking a steadier line on capacity.
The yield increase was further helped by fuel related fare increases. Whether through explicit fuel surcharges or of a more general nature, they have stuck.
And while fuel costs remain painful, their influence could be waning. Fuel expense in the September quarter was up by over 50%from the previous year, but airline revenues also rose strongly, helping to offset the additional price of fuel.
Fuel expense as a proportion of revenues did edge up from a year ago, but only slightly. In stock market terms the negative impact of fuel appears almost exhausted.
Of course, for the major intercontinental carriers the weakness of the Euro against the US dollar has helped on the yields side. In the case of Lufthansa, the currency factor accounted for about a third of the improvement. However, there have been some significant improvements in underlying yields with the prospect of more to come - if the restraint holds.
The key questions for the near future are whether the recent spell of rational behaviour will continue, and whether the good economic outlook will hold up.
Attention is focused on the USA, in particular the nature and the rate of the reduction in economic activity. Options range from soft landing to recession.
Hard or soft landing?
Whilst some key indicators give cause for concern, recent statements suggest that landing may be soft, a view supported by the prospect of a loosening of interest rates. Given the importance of expectations in economic behaviour, perhaps it should be a case of preparing for the worst and hoping for the best.
Naturally, it is better to go into a slowdown with too little capacity than too much, even if that slowdown turns out to be less severe than expected.
Such questions of fundamental economic activity are at the heart of the Traffic Demand Indicator (TDI) model built by Airline Business and Commerzbank to monitor underlying traffic demand. Fuller predictions from the TDI model will be published in the coming months. However, it seems clear that Europe's airlines could expect an underlying traffic growth of at least 6% even if the US economic growth rate were to slip, as expected, to 2% over the next year.
The lucrative North Atlantic market would obviously slow the most if that did occur. But overall, we remain comfortable with the 3-4% capacity increase currently in prospect for Europe's major airlines.
This rate of growth could even slow further if planning expectations were further downgraded - a reasonable and not unrealistic assumption.
Although Europe's majors can now point to two good quarters and to the prospect of more to come, it is almost inevitable that stock market attention will focus on the direction of the US economy. Such concerns may overshadow the otherwise bright near-term outlook in determining stock prices. If they do, that will be despite the fact that the industry is in almost immeasurably better shape to cope with a slow down than in was in the early 1990s. That recession followed a boom (1986-1990) which had seen airlines place orders for 6,000 jet aircraft, or around half of the installed jet fleet.
Using tried and tested fleet absorption ratio analysis, it is possible to calculate that planned deliveries and the concomitant capacity increase bodes well for the future. Time will tell how long into the New Year such optimism will last.
Source: Airline Business
