A constant theme of our analysis over the last few months has been the relationship between capacity - or more precisely excess capacity - and yields. A recent surge in capacity, especially on the North Atlantic, showed up as yield decline of perhaps 4% for Europe's major airlines in the June quarter.
There have also been early signs that the industry will move back towards equilibrium, with a better balance between capacity and traffic, during next year. Indeed, the November capacity figures give grounds for some mild encouragement as a first step in the right direction.
However, this move towards equilibrium is not like a light being switched and off. The effects of a period of excess continue to ripple through the system for some time, even after the adjustment cycle has begun. The cumulative effects of excess capacity will similarly take time to subside after this latest hike.
For the European majors, the turning point for yields is likely to be well into 2000. The issue is further complicated because, while in some markets at least, aggregate capacity and underlying traffic may be in better balance, there is significant pain from a change in mix, with a migration from the front to the back of the aircraft.
In reality, the interdependent relationship between economic growth (GDP), traffic, capacity and yields is somewhat more complex than the rules of thumb suggest.
There are two major elements of airline traffic for any given level of capacity. The first is the "real", or underlying element, which is determined by the rate of economic growth. The second is the "stimulated" element - that part which is generated by lower prices in the market. Almost by definition, the greater the relative importance of underlying traffic, clearly the better for yields. Conversely, the more that traffic growth is capacity led, the worse for yields. Note, however, that for any particular airline the actual amount of traffic that they win also depends on its competitive position in the market and indeed its own strategy.
Commerzbank, together with Airline Business, has set out to create a new measure for this underlying gap: the Traffic Deficiency Indicator (TDI). The aim has been to reveal the degree of real excess capacity in the marketplace. The TDI number represents the gap between the rate of underlying (GDP driven) traffic growth and the actual change in capacity.
Of course, from the published traffic and capacity figures, it is possible to see the reported gap - it is the difference between the real rate of traffic growth and the rate of capacity growth - the fundamental gap - at the level of individual routes or route groups that is of paramount importance.
Perhaps of more interest is what has been going on for the airlines this year. As there has been a persistent view that there has been too much capacity, clearly the issue is: how much is too much?
For the first time, we publish here some of the results of the joint analysis on the whole issue of capacity and yields. Further analysis will be published over the next few months.
For now, however, we have focused on a number of European route groups. Two features are striking:
Within Europe there appears to be a new balance in terms of traffic at the low end of our forecast range (4.2%) and the latest results from the European majors (4.1%). Both, however, are greater than the rate of capacity increase (6.2%). For the long-haul market, the TDI model suggests an underlying real demand of 6.1%, a full 3.1 percentage points below the capacity growth of the AEA airlines, although there are significant differences between markets.On the North Atlantic, meanwhile, the headline rate of capacity growth appears to be easing: the increase slowed in November to 8.8% against 12.2% in October. But the imbalance will continue into 2000. The TDI model suggests that the market is actually growing at an underlying rate of 6.6% this year. Set against latest figures from the Association of European Airlines (AEA)that suggests "real" excess capacity of close to 7 percentage points and the cause of the dramatic falls in yield.
Not all of Europe's individual national markets show the same potential for underlying growth, however. The range on the North Atlantic starts at 6.1% running up to 9.7%.
Against this background, the yield pain of the year so far is perhaps hardly surprising.
Source: Airline Business
