Market sentiment is generally optimistic, although there are warnings of overcapacity to come, writes Chris Tarry of CTAIRA. Analyses by Flight Insight
The recent Geneva Aircraft Finance Forum provided a first-class opportunity to harvest the views of the 550 delegates from more than 40 countries on their view of the future based on what is happening today.
The forum represented all facets of the aviation industry from manufacturers, through financiers to airlines. As the moderator of a session, CTAIRA posed a series of questions on a range of issues of importance to delegates at the event. The answers from this snapshot provide a useful insight into current thinking and may well have implications for future strategies.
The questions started with some of the basics. The most favoured view was that generally held by the industry that the average rate of traffic growth over the next five years was likely to be in the 4-5% range. Given that pricing power reflects the relationship between demand and supply it was logical to ask about the expected rate of capacity growth over the same period. The majority opinion was for an increase of 5-6% - raising the spectre of overcapacity.
There has been considerable comment on the nature of the current cycle, with some observers suggesting that sustained economic growth, increased liberalisation and industry diversification are combining to generate some kind of "super cycle", extending for much longer than normal. However the prevalent view was that profits would peak in 2008 - although almost a quarter of voters thought that they would peak this year.
In terms of aircraft deliveries, the prevailing view was that the most likely year for peak deliveries will be 2010, adding weight to the view that yields and profits are likely to be on a one-way street.
In reality little weight was given to the "super cycle" view, with fewer than 8% believing it was happening in terms of profits and less than 3% in respect of aircraft deliveries.
It is perhaps unsurprising that 53% of those questioned agreed that finance was more important than airline profitability in respect of the timing of new orders. Similarly, 56% felt that there has been over-ordering in the current cycle and that as a result cancellations are inevitable.
Turning to the attractiveness of particular business models, over two thirds thought that airlines were more likely to introduce premium-class services. However, only 40% thought that standalone premium-class airlines would "survive and prosper", and just 14% said that they would invest in a standalone airline of this type (not operating as part of a major airline).
There is general acceptance that further consolidation is inevitable and most recently an expectation that if the latest proposals on Transatlantic Open Skies are approved the process will accelerate. However, as we have often argued, there is a real need for any consolidation to produce shareholder value.
To this end there was a clear 62% majority for the view that consolidation involving two or more airlines would produce shareholder value, whereas in respect of private equity funds, 72% thought they would be unable to generate sufficient returns from airlines in their required time period.
So what might it all mean?
As we have often argued in this column, the rules of economics apply to this industry, so the view that capacity is expected to grow faster than traffic will not be positive for yields. While the prevailing view is that geopolitical events represent the greatest near term risk to the industry, a fifth of the voters took the view that the economy also posed a risk.
The belief that finance rather than profit performance was more important for aircraft ordering was no different from the view expressed twelve months earlier and indeed it is clear that at the present time there is no shortage of money to finance aircraft assets.
The opinion that the industry has over-ordered should give comfort to those who have missed out on the current order cycle and who may therefore have to wait longer for deliveries of new aircraft. Their patience may be rewarded, however, as aircraft become available as a result.
Delegates believed that shareholders should have little to fear from consolidation because it will enhance shareholder value.
But the view expressed in respect of the perceived inability of private equity funds to realise the returns they need from the airline sector within an acceptable timescale may well be of interest "down under" as private Airline Partners Australia continues its struggle to take over Qantas.
Source: Airline Business
