Time to make some adjustments
In the last issue of Airline Business I wrote of the mixed messages that were emanating from the industry - but what a difference a month makes. There have been a number of statements and suggestions regarding just how difficult the outlook is becoming. Since the March article, British Airways used its investor day to announce what some commentators called a profit warning in that it now expected its operating margin to decline from the still forecast 10% for this financial year to 7% for the year to the end of March 2009. And ILFC chief Steve Udvar-Hazy commented that no more than 75% of the order book is "rock solid".
Despite behaviour which might suggest a contrary view, the rules of economics do apply to the aviation industry just as they do to any other. The severity of the emerging slowdown will depend on where you are and where you operate to. With this in mind concerns inevitably relate to the domestic US, transatlantic and European markets, although the particular factors that will impact will have different relative effects.
In the US and transatlantic markets it is a question of the economic slowdown and high fuel costs, while in domestic Europe it is this and also too much capacity being introduced against a weakening background which will result in traffic redistribution rather than meaningful overall growth. In Asia, the main issues, at least in the near-term, are fuel price and increased competition.
For many of the Europeans the outlook includes yet another cost cutting programme. For some managements there are significant challenges in securing workforce acceptance and support as the benefits of their previous efforts have been transitory.
What then of the views of others? At the recent Geneva Aircraft Finance Forum delegates from across the aviation industry gave their thoughts. Firstly, on expectations for traffic and capacity growth over the next three years 51% of delegates were in favour of traffic growing at an annual average rate of between 4% and 5% - although some 26% thought it would be less than 4%. On the other hand, 48% thought capacity would grow at some 5-6% with 25% voting for a 4-5% increase. This suggests structural pressure on revenues - even more so if some of the traffic growth is an outcome of lower yields.
Last year delegates were asked what they perceived was the greatest risk to the industry from a list that included the economy, fuel, labour and geopolitical events. Two-thirds voted for geo-political events, 21% for the economy and 12% for fuel. This time the votes were 8% for geopolitical events, 52% for the economy and 37% for fuel with 3% for labour - an outcome not only showing how things have changed but equally how recent events condition behaviour.
Moving on there was an overwhelming majority view (85% to 15%) that consolidation would increase over the next two years and almost 55% thought this would result in financial improvement. Just 9% thought consolidation would lead to improved shareholder returns.
The challenges and opportunities on the supply side were highlighted when some 83% of the voters agreed with the sentiment that the industry had over ordered (up from 56% a year earlier). Furthermore, 60% thought there were fewer than 500 aircraft involved whereas 36% thought the figure lay between 500 and 1,000. The actual figure is unclear, but it does mean that those who wait may be rewarded with a near-term delivery.
So what do the results tell us? Primarily that things have changed rapidly over the last year and the outlook is more cautious. But as the conclusion that the industry has over ordered suggests, 2008 will be a year of adjustment. It will also be a year of realisation. The one thing we do know is that when change is necessary, it is neither instant nor costless.
Source: Airline Business
