Traveller numbers were hit by the impact of SARS and fall-out from the war in Iraq in 2003. This year has seen the low-cost influence growing as carriers rush to add capacity
The importance of the low-cost sector to world flying comes through loud and clear in the latest passenger traffic ranking of the top 200 carriers for 2003. In a year when SARS and the war in Iraq blunted early optimism that 2003 would see recovery start in earnest, the low-cost tidal wave has grown. It has spread further into Asia-Pacific, boomed in Europe, consolidated in the USA and made its first appearance in the Middle East.
Overall, however, the global traffic picture is one of minimal growth. The ranking shows that, among the top 200 passenger airlines, traffic crept up by 1.4%. Although modest, this growth was almost enough to bring traffic levels back to the peak seen in 2000. Barring unforeseen disasters, the 2004 ranking should show an industry recording solid annual growth once again. The ranking itself is compiled by Air Transport Intelligence, the sister online service to Airline Business, from its database that holds traffic for 350 carriers. The ranking includes data for the largest 200 individual passenger operations.
A deeper examination of the figures shows the low-cost sector was almost singlehandedly responsible for industry growth last year. Low-cost carriers in the top 200 added 30% more traffic. Regionals fared well too, climbing by 23%, while leisure carriers showed a small rise. Only the mainline carriers, on a much larger base, saw a decline. Without low-cost growth the industry would have stagnated. Take out the regionals, many of which are boosting service by taking over flying from mainline carriers, and it would have fallen back. This is not even the whole picture, since traffic from some captive low-cost units like Delta's Song or Air Canada's Tango are included in the mainline carrier numbers for the time being. Also not included in the low-cost total are the low-fare units of some leisure operators where the numbers are not broken out.
Leading the charge
The analysis shows how large the low-cost sector has become. Its share of traffic among the top 200 carriers now tops 10% of passengers and 6% of traffic. As a group, the sector was the only one to increase its employee base.
Traffic barely limped into growth last year but, since mid-2003, volumes have risen across the board. Indeed, IATA reports that international traffic rose by 19.4% in the first five months of 2004 compared with the period last year during which SARS struck.
Asia-Pacific - the region that fell furthest and fastest - is leading the charge. "We are now into 12 months of solid recovery," says Peter Negline, Hong Kong-based analyst with JP Morgan. According to IATA's new chief economist Brian Pearce: "There is some very strong growth on both intra-regional and international flying above and beyond the SARS effect."
IATA estimates the underlying growth trend for Asian carriers on international services, stripping out the effect of SARS, is 6.5%. The outlook for the rest of the year is that growth will be sustained but some, like Negline, reserve their judgement for 2005. For Pearce, the cyclical slowdown in China and some Asian economies has to be monitored closely and there are concerns about inflationary pressures that may temper growth. "But this will only be a temporary slowdown from what have been very high growth levels," he says.
A return to growth has seen many Asian carriers add significant capacity. "We are keeping an eye on capacity - there is a lot of growth coming through," says Negline. According to JP Morgan's analysis, Cathay Pacific, for example, is expanding capacity by 32% this year. Of this, 20% is attributable to returning SARS capacity but 12% is through natural growth, which is "pretty awesome", he says.
Although low-cost carriers represent only a tiny fraction of Asia-Pacific traffic, new players are rushing into the market and pioneers in the region continue to boom. Australia's Virgin Blue saw traffic climb by 61%. One of the next regions likely to witness the low-cost boom is India, a market beginning to show promising moves toward liberalisation.
Network carriers may dominate in total volume terms but they stagnated in 2003 as the low-cost operators flourished. The network carrier that can match growth levels such as easyJet's 92%, JetBlue's 68% or Gol's 55% is virtually non-existent. That is not too surprising considering that majors already have a large critical mass. A region where the traditional players did show healthy growth is the Middle East. Emirates, Gulf Air and Qatar Airways all grew by double-digit percentages last year.
The outlook for international traffic over the next two years could see more network carriers joining this band. IATA estimates headline growth of 6.9% this year and 7.2% next, says Pearce, and those figures may be revised upwards. The North American region though, is causing concern. "The market is very flat even though the economy has been pretty good," says Pearce, "but it has been more or less a jobless recovery and it has also been a passengerless recovery". IATA sees international traffic rising by over 2% this year.
Capacity worries, with the knock-on effect of lowering yields, are surfacing in North American, European and transatlantic markets. Analysts warn of the need for discipline in adding capacity. In its most recent analysis of the North American market, Lehman Brothers said: "The supply-demand imbalance persists and yields remain under pressure".
Strong domestic competitive pressures have made it difficult for US network carriers to make any fare rises stick so far this year and Lehman Brothers believes prices may fall, given the significant capacity-growth plans. "We find it difficult to economically justify 7-8% capacity growth this year, given financial condition of the network airlines," says Lehman Brothers.
Competitive response
Capacity growth is always on the minds of low-cost carriers. This year Southwest has made a strong move into Philadelphia, a US Airways hub, while JetBlue continues to add routes and frequencies. Another challenger is set to enter the fray next year since Virgin America announced it would establish its main base at San Francisco.
Not only is the market awash with thousands of new seats from the established low-cost players, and a bevy of start-ups, there is also a tough competitive response from network carriers. The result is taking its toll on profits and yields. Many believe this will lead to further consolidation and, inevitably, failures. But, if demand continues to be strong, the consumer is unlikely to care as their appetite for reasonably priced air travel appears unquenched.
Report by mark pilling in london
Source: Airline Business
