As the downturn bites, everyone is updating their plans, writes Chris Tarry. Analysis from Antonio Panariello of Flight Insight
In the January issue of Airline Business I touched briefly on issues of consumer confidence. At the time the index measuring confidence in the USA had fallen to levels last seen in March 2003.
The latest data is even less encouraging and in respect of future expectations, it appears confidence is at its lowest levels since the late 1970s. The USA is not alone and a number of surveys from Europe are pointing down.
The economic malaise affecting the USA and parts of Europe appears relatively contained for now. However, the International Monetary Fund has recently cut, in some cases sharply, its growth forecasts for the USA and Europe. It suggests that there is a one in four chance of a global recession - or to look at it another way a three in four chance that there won't be.
Over the next two years it is inevitable that most if not all economies will see growth slowing - some markedly - even if a technical recession is avoided. While the growth forecasts have been cut for 2008, some are even lower for 2009 and there remains a risk on the downside.
For the USA the IMF expects real GDP growth of just 0.5% in 2008 (halved compared to forecasts at the start of the year) and 0.6% in 2009 (compared with 2.7% in 2007). For Europe it expects 1.4% followed by 1.2% (compared to 2.6% in 2007), and for the UK 1.6% in both years (from 3.1% in 2007). Looking towards Asia, growth in the newly industrialising economies is forecast to be 4% followed by 4.4% (from 5.6% in 2007). Both China and India are expected to slow China by two percentage points from 2007's growth of 11.4% and India by just over one percentage point from 9.2% in 2007.
There should be few surprises weakening economic growth will show through on travel in terms of adverse volumes and mix, and lower prices. While the latest delivery delays to long-haul aircraft are frustrating for the airlines scheduled to get them, the overall effect is that capacity growth will be more modest.
If it wasn't challenging enough then there is the issue of fuel. IATA's latest forecasts suggest that the global fuel bill will be some $58 billion higher than in 2007 - equivalent to 10-11% of sales revenue. Despite the views in some quarters that fuel surcharges are automatic, they need the existence of relative excess demand to ensure that they hold.
Over the last month we have seen a number of airline failures mainly in the USA, and there will undoubtedly be more to follow. Airline failures also have consequences on the supply side. For example, the failure of Skybus in April means that lessors have 11 Airbus A319s which will have to be placed with new operators and that Airbus now has 65 available A319 delivery positions between the final quarter of 2008 and the end of 2012.
Returning to the issue of expectations, which condition the way in which we all act and are clearly evident as assumptions in business plans, the key question now is: how have our own expectations changed over the last three months and what might the future hold? What is clear is that we are moving from an environment which was broadly stable and where airline profits were still improving - although the peak margin was only about half that achieved in the previous peak - to one which is inherently unstable. For some the future is clearly going to be challenging, but for others there will be opportunities to be had.
On one hand the consumer is clearly going to be a beneficiary from lower fares, while on the other those who have access to affordable capital and strong balance sheets will be able to avail themselves of lower prices, whether it be for aircraft, airlines or airports. It is clear that events that have cyclical origins may have structural consequences.
Source: Airline Business
