Last year ended with traffic finally showing signs of firmer growth, but the pressure on fares has not disappeared and so neither should the restraint of capacity, writes Chris Tarry of CTAIRA.
Over the last few months, we have observed how the industry is moving back towards a balance between supply and demand. Figures from all the major regions show that traffic has ended the year running comfortably ahead of capacity.
But although the industry has reached a turning point, it is clear that this balance has only been achieved after a step down in the average level of fares. In some markets there is now evidence of a better mix of traffic as business travellers begin to return, but more generally the market remains fragile and sensitive to price.
At the same time there is a seemingly inexhaustible supply of hopefuls that want to paint their name on the side of an aircraft and so add capacity. There is also a substantial idle fleet of units deemed to be available - up to 2,500 on some estimates. Although only a proportion of these may be re-absorbed by the market they continue to represent a capacity overhang. In any case, as we have often argued, it is one thing to acquire an aircraft cheaply, the tougher task is to fly the asset profitably.
There have recently been some very clear manifestations of the consequences of earlier over-optimistic ordering reaching its rendezvous with market reality. Ryanair has stated that it will need to adjust (in other words to slip) its highly ambitious delivery schedule for new Boeing 737s. At the same time, Delta Air Lines is also deferring some widebody deliveries, while SAS Scandinavian Airlines has publicly stated that it really does not need an aircraft the size of the Airbus A321 and has gone on to say that it cannot afford to buy any new aircraft until 2006.
Last month in this column we put forward an estimate of world traffic growth in the region of 6-7% for this year. Yet the worst thing that could happen is for the industry simply to raise capacity to meet this demand. Although there may be some capacity gains to be made from more efficient fleet deployment, the overall message should be one of restraint if there is to be any degree of structural recovery in fares.
Theoretically, to meet replacement demand. the industry needs to acquire 500-600 aircraft a year. Given the current production schedules of the manufacturers, this may in fact be the level of deliveries this year. The near-term risk is that stored and parked aircraft return to service.
There is a clear temptation to get idle aircraft up in the air and earning revenues again, but the immediate consequence would be further yield pressure. However, with much of the industry still driven by maintaining, if not gaining, market share, the temptation for some may be overwhelming.
While the contents of the summer season timetables will be known later in March, comparisons with last year will need to be caveated. Taking a look at the OAG figures for the year so far through to March, there appears to be, at least at an industry level, behaviour that economists would describe as rational. This, however, hides some private market share battles.
For example, passenger capacity on the North Atlantic was up by a relatively modest 2.1% in February and is planned to rise 3.7% on the basis of the OAG schedules for March. Within this aggregate, however, the statistics suggest that British Airways increased capacity by 17.6% last month in this route area and plans growth of 20.2% in the month ahead.
By contrast, US carriers are planning no better than to keep capacity flat on the North Atlantic in the next few weeks. Their capacity increases are instead being trained on Latin America, which has been a real focus of attention since 2001. The March OAG schedules continue to show double digit growth from North to South America and close to 20% on Caribbean routes. Full-year figures from the Air Transport Association confirm Latin America as the strongest growing market for the US majors with 4.5% traffic growth.
As we move through the year the need will be to focus on the underlying changes, taking into account the distortions in 2003 resulting from the Iraq War and SARS in particular.
Past experiences are never a bad guide to future behaviour. After the last Gulf War in the early part of the last decade, for example, capacity increases in the recovery period were relatively modest for a number of reasons, including the desire to avoid further financial pain.
This time around, although there have been a number of structural changes, including new entrants providing a source of new market capacity, the way in which the environment develops will depend where you are and who you are. In particular the most significant pressures are likely to be in the short-haul segments as these are the easiest to enter. For most airlines, however, there is the real chance that control will - perhaps - be exercised over adding capacity. The industry remains a growth industry: the need is to ensure growth is profitable.
Source: Airline Business
