The outlook for airlines and the wider system is dire, writes Chris Tarry. Analysis from Antonio Panariello of Flight Insight
Last month I said that with fuel prices at their current levels the industry had to increase revenues or reduce costs by some $60 billion just to break even. This month while there could be some gap closure, the outlook remains dire.
The general reaction to previous crises in the industry has been to cut fares and find the point at which passengers will travel and make some adjustment to forward orders and to costs. This time all airlines face sharply increased fuel bills and while the natural reaction may be to increase fares, this will have a traffic and revenue effect. The industry may indeed be close to the point where a 10% increase in fares results in a 7% reduction in traffic. Some airlines have been able to push through fare increases without impacting demand.
At the recent IATA annual general meeting the view was expressed by Air France-KLM chairman Jean-Cyril Spinetta that "if there is no discipline on capacity it will be a disaster", while the view of others including British Airways chief executive Willie Walsh was that there was no option other than to reduce capacity. At the moment this is more of a US and European response. However, it cannot be done immediately and most cuts will not be until the end of the summer season. Even then the actions are not costless, but by grounding aircraft the losses will be less than continuing to fly - a least worst or less worse option.
A number of airlines have already announced their intentions. Ryanair is temporarily grounding 20 aircraft (up from seven last year) American Airlines is to reduce fourth quarter mainline capacity by some 11-12% through retirements Continental by 11% in the fourth quarter in its domestic mainline network and United announced a 14% reduction in US domestic capacity in the final quarter (10% for the mainline business overall), with a 12% capacity reduction planned for the mainline airline in 2009. United plans to achieve this through retirements, but for some aircraft this is dependent on it being able to work out terms with certain lessors in respect to its Boeing 737 fleet.
It is important to consider the likely effects of capacity reductions on airports, particularly secondary or regional airports in Europe where low-cost carriers have established a presence and where the economics of the airport are somewhat dependent on growing passenger numbers rather than revenue from aviation charges.
For the winter season 2007 Ryanair grounded some seven aircraft at London Stansted and, although there were undoubtedly a number of other effects, passenger numbers through the airport were down between 6.3% and 9.2% between November and January. This gives an indication of what will happen this winter - few if any airports in Europe will be immune.
Beyond this there is also the issue of still rising delivery rates for short-haul aircraft. While at least for a short period aircraft that have become unwanted will likely be absorbed, it is increasingly clear that a number of those airlines which have announced and/or are considering downward capacity adjustments have no need for additional aircraft in the near- or medium-term.
It looks like there will need to be a significant transfer of risk away from the airline and back to the manufacturer. In the 1980s there was what became known as the "walk away lease deal" between Douglas and American it remains to be seen whether the manufacturers will follow a similar route this time.
The lessors are not immune either and here the need will be to find that market clearing price to get a grounded aircraft flying again - indeed for some airlines this may be an opportunity as prices fall - but there will still be the need to justify the requirement for the aircraft.
Source: Airline Business
