With world economic growth still surprisingly robust, the outlook for airline traffic just keeps getting better. Last month, an initial run of figures from the Commerzbank/ Airline Business traffic model gave indications that passenger demand would rise ahead of capacity on key markets. That view is underscored by the latest set of revised figures now coming out of the model.
Demand estimates for 2000, based on the underlying link between traffic and economic growth, are now pegged at 7-8% or more in the main long-haul markets for European and US carriers. That is already a significant rise on the5-6% for 1999 and ever since the start of the year the outlook has been improving as forecasts for the world's principal economies have, themselves, continued to improve. While attention is still focused on the likely extent of a US slowdown, that appears to be an issue for next year.
The upturn is perhaps most welcome for the European majors. For them, the prospect is for an 8.6%growth on long-haul routes this year and around 7% within Europe. Even factoring in a realistic forecasts for US downturn, demand could be in the region of 7% again next year too. Just as positive is the continuing talk of capacity constraint. If the resolve holds, seat growth is now expected to be under 3% this year, opening up a positive gap between supply and demand.
For the US majors, the revised 2000 estimate shows demand at 7.6% on international routes - almost three points up on the 1999 outlook. The fact that the North Atlantic growth figure is not quite as buoyant for the US airlines as their European counterparts reflects the relative mix of traffic and range of routes served from their side of the Atlantic.
Asian airlines are still better placed with underlying growth close to 12% this year and topping 13% in 2001. Even with current expansion plans, passenger demand should stay comfortably ahead of seat supply.
So is the industry at last poised to enter a new golden age? Anyone who has lived through previous industry cycles may have cause for doubt. The last time that the airline market reached its peak, in the late 1980s, the familiar pattern returned: strong traffic figures led to a wave of new aircraft ordering which, given the lags in the system, arrived just as the market turned down.
There were special factors in the early 1990s, - not least the Gulf War. But a greater part of the problem was the 14% increase in capacity in 1992 which had its origins in the order boom of the late 1980s. In a four-year period the industry had placed jet aircraft orders equivalent to around half of the in-service fleet. After a period of gain in the boom years came the pain of the bust in the early 1990s. Then, once more, came a spell of restraint, or what economists refer to as an "outbreak of rational behaviour".
If the golden age is to be realised then there must be a break in that gain-to-pain cycle. The most persuasive reason for that to happen comes from the fact that today an increasing number of airline groups have private shareholders to satisfy and more are joining the queue to make the transition from public to private ownership.
To attract and retain those investors it is clear that the industry needs to improve on its traditionally low and wildly variable returns. At the end of the day, share dealing too is governed by the laws of supply and demand. Stock prices only go up if there are more buyers than sellers.
We hear all the time that air transport is a growth industry. But rising traffic alone is not a necessary and sufficient condition for the profits growth that investors require. There are other key measures for growth besides the traditional fixations on revenue, traffic and market share. What about measures of profits, assets or shareholder value? Equity analysts are not alone in concluding that it is indeed shareholder value that should be seen as the most important of those targets for growth.
Furthermore, there is fundamental change taking place in the airline value chain, steering the debate towards issues of market access and reach, rather than simply about putting more aircraft into service.
In the near term, the traffic outlook is certainly favourable, and the benefits of that are due to become increasingly evident as the industry moves through this year and into the next. But airlines as a group must avoid the temptation, once again, to snatch defeat from the jaws of victory. Or to put it another way, there is the need to break what would appear to be the habit of a life time.
The message may sound a little repetitive, but it is well worth repeating, especially at a time when there appears to be a real opportunity to start changing the patterns of old. With a better outlook for traffic, the prospect of low rates of capacity growth in the near term and a manageable level of new aircraft deliveries, everything is in place for better times ahead. This is the time for change - a sudden upsurge in orders and a return to the painful environment of excess capacity in the next three or four years can be avoided. The choice is in the industry's hands.
Source: Airline Business
