Airlines in all regions face an extremely tough 2009 as the world heads into what looks set to be a lengthy and painful recession. Oil prices may have dropped considerably from their peak of $147 a barrel in July, but carriers are now faced with falling demand for air travel and the toughest revenue environment in half a century, says the International Air Transport Association.
"Recession is by far the biggest threat facing the airline industry," says IATA director general Giovanni Bisignani. "It is more concerning [than high oil prices] because it is the first truly global recession the airline industry has faced. Never will we have seen revenues go down so dramatically."
LOSSES FORECAST
This time last year IATA was predicting a $5 billion profit for the airline industry in 2008, but this has now reversed into a $5 billion loss. Based on oil prices of $60 a barrel, IATA is predicting industry losses of $2.5 billion in 2009. This halving of 2008 losses might sound like a positive for the industry, but it is largely due to an expected turnaround in North American carriers' fortunes from a net loss of $3.9 billion in 2008 to a slight profit of $300 million in 2009. Other regions, however, will fare much worse than they did last year.
IATA expects losses will reach more than $1 billion in 2009 in both Europe and Asia Pacific, compared with respective losses of $100 million and $500 million the previous year. Losses in the Middle East and Latin America will double to $200 million, while African carriers will see deficits remain flat at $300 million. Overall traffic will fall 3% in 2009, marking an about-turn from IATA's earlier prediction that traffic this year would grow by the same amount. "We're seeing a very steep fall-off in business travel, which is highly sensitive to the cycle," says IATA chief economist Brian Pearce.
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Airline revenues in 2009 will fall by $36 billion year-over-year to $500 billion, says IATA. To put this into perspective and to highlight just how dire the revenue situation is expected to be, the last industry downturn saw revenues fall by just $1 billion year-over-year to $306 billion in 2002.
The expected turnaround in North American fortunes is partly because US carriers were not as successful as some Asian and European counterparts at entering into hedging contracts when fuel was at its most expensive. While this hurt US carriers, the upside was that they were able to take advantage of the lower spot price of oil much sooner than airlines in other regions, which were still locked into paying a higher price for their fuel. In addition, US carriers have already taken significant steps to slash their capacity, which will help them cope with falling traffic in 2009.
But airlines in the USA should not be too smug, as they may face difficulties in financing the aircraft they need to renew ageing fleets. "In the USA there is a big need toreplace the fleet," says Pearce. "Because of the credit crunch it is getting increasinglydifficult to finance new aircraft. The market will look to ExIm banks and manufacturers increasingly. The lack of capital looks to be a real issue, as well as the fact that airlines are parking aircraft." Pearce believes the result of this will be that "some orders and deliveries will be at least deferred and some cancelled".
AIRLINE FAILURES
Although more than 30 airlines have recently failed and withdrawn from the market, Pearce says this represents just 1% of global capacity. There will still be too much capacity in the market for the industry to cope effectively with the projected drop in traffic. "It's going to be a very challenging environment for airlines. Those that can control and reduce their costs will survive and maybe succeed.
"Labour and employment costs will have to shrink with the industry," he says, adding that foreign ownership and control regulations limit the airline industry's ability to shed excess capacity. "In a more rational world, where we could have cross-border consolidation, this would lead to a more orderly and sensible shrinkage of capacity."
Bisignani predicts the expected drop in revenues next year will be so sharp that it will take airlines "at least two years" to recover, casting a shadow over the short- to medium-term outlook for the industry. "Normally I'm optimistic, but it's hard to find something that supports optimism," he says. "I will start to be more optimistic when freight numbers improve consistently - then we can say the worst is over."
Source: Flight International
