The airline experience that followed the Gulf War offers some pointers for today, but there are differences too, says Chris Tarry of Commerzbank.
Who now knows what the future holds now? The short answer, of course, is no-one. Even before the cataclysmic events of 11 September the industry was facing an increasingly difficult future. Now, not only has the environment become many orders of magnitude more difficult, but the outlook is also extremely uncertain. Indeed, it has also become ever more unpredictable and unforecastable. However that is not a particularly useful piece of analysis for those managements now faced with hard business planning decisions. Action is needed and indeed managements have wasted little time in providing it.
There is clearly nothing that comes close to the current attacks, with which to compare data. Although the experiences at the time of the Gulf War in 1991 can be used as a guide to what might happen, September's events and the likely aftermath mean that the only parallel is the immediate and sharp fall in traffic. It is important to look at the differences perhaps more than the similarities.
The most immediate similarity is the emergence of a "threat effect" or fear factor for travellers. This was very clearly evident in 1991 when traffic in February, the first full month after the war broke out, fell by some 24% for the European airlines. Although March was 13.8% lower, it took until the end of the year before growth wasre-established. The airline traffic figures will confirm the effects this time around. The inevitable fall in forward bookings was evident in figures from Amadeus that showed in the immediate aftermath that US domestic bookings were 74% lower and bookings for services from the USA were 19% lower. The industry will have to wait to see the new trend - if there is one.
What was also seen in 1991 for the full year was a sharp fall in the number of US citizens travelling across the Atlantic. Department of Commerce figures show that the number of US citizens travelling to Europe fell by 27%. On the other hand, European residents travelling to the USA increased by 10.5% and the overall USA-Europe market fell by 14% in passenger numbers.
In 1991 British Airways cut its work force by 10%, put a further 4-5% on half pay for up to a year, delay aircraft deliveries and in April have a month where all travel was free.
That was then. The ramifications of the events of September will be wider and longer lasting. To a large part the traffic outlook will be determined by the nature and form of the political/military response of the USA and its allies. It will not be until the "fear factor " is removed that traffic will recover and this time the price mechanism is unlikely to overcome it
The effect on the US airline industry, with 80% of its business in the domestic market, has been dramatic and immediate. The response has been similarly dramatic: around 100,000 lay-offs already announced and an agreement from Congress for a $5 billion cash injection. The measurable effect is a near 20% reduction in capacity. In Europe the major airlines have acted as quickly with announcements on the capacity side, and several taking measures to cut labour. The estimate here was that the industry lost $30 million of revenue a day during the grounding.
The outlook for the industry pre-September was already making the need for cutbacks look inevitable with markets turning down much more steeply than expected. Inevitably there is now suspicion that the latest cuts are in part an attempt to address this pre-existing need for cost reductions as well as a crisis measure. This is perhaps irrelevant. The real issue that some in the industry face is one of survival.
The speed of the response may have taken some observers by surprise but the immediate requirement for all airlines is to conserve what cash there is still coming into the industry.
This column has often talked of the high operational gearing of the airline industry which is fine in an upswing. The picture is very different in a downswing and in particular when there is a catastrophic collapse in revenues. With effectively 100% of costs fixed by the nature of the flying programme, any reduction in traffic revenue flows not only to the bottom line, but also impacts immediately upon cashflow. The ability of an airline to generate cash, and to protect its cash position, is fundamental, and so, for some, the next few months will be a survival issue. In addition, the focus is on available liquidity already in the business and the access to additional lines that are available.
As a result, rapid decisions have to be taken not only about what services to fly and how many aircraft need to be taken out of the system. Action also needs to be taken to downsize the whole business at least in proportion with the reduction in capacity as the benefit of grounding aircraft alone is slight.
On the other side of the equation the industry is to bear additional insurance and security costs - but here there is a role that governments may play. What is clear is that there should be no blank cheque subsidies. In addition, the additional check-in and security requirements will have a significant impact on turnaround times with consequences for hub-and-spoke networks and the need for airport terminal capacity all adding to cost. But if that is what it takes then so be it.
While there is always a temptation for the near term outlook to be conditioned by the immediate past experience, the terrorist attacks, and the as yet unknown aftermath, are likely to result in a fundamentally changed air transport industry in many respects.
It may well be that the appalling events in the US ultimately result in an industry where capacity is more closely matched with fundamental demand both as airlines exit and others cut back. At the present time, however, our principal thoughts are quite rightly elsewhere.
Source: Airline Business
