ALEXANDER CAMPBELL/BUSINESS EDITOR
Will improved economy bring traffic growth for the world's carriers?
Next year will bring good news for the world, and for the airline industry in particular, with a global economic upturn boosting traffic around the globe. Building on predictions of worldwide recovery, the International Civil Aviation Organisation looks back at two years (2002 and 2003) of virtually zero growth, for all the familiar reasons - terrorism, war, SARS, economic downturns - but predicts strong growth in the future, with world traffic rising 4.4% in 2004 and 6.3% in 2005.
Growth will be helped by the absence of further mass-casualty attacks on commercial aviation. Since 11 September, while attempts have been made - for example, the "shoe bomber" Abdel Rahim, alias Richard Reid, in December 2001, and the attempt in Mombasa to shoot down an Arkia Boeing 737 with surface-to-air missiles in 2002 - no terrorist has brought down an airliner. Tighter security means that airliners will remain hard targets in 2004, pushing those interested in the delivery of mass murder toward softer objectives.
It is worth remembering, however, that 12 months ago nobody expected that a pneumonia virus normally found in farmyard ducks would leap the species barrier, kill hundreds of people and, indirectly, cost airlines in east Asia and around the world several billion dollars in sales. This sort of wild card aside, the way seems clear for the airlines to recover. There is no reason to suppose that the decades-old link between economic growth and traffic growth has been broken now, and so the coming year will see strong growth, especially in east Asia, now recovered from the SARS epidemic.
There are other reasons to be optimistic: consolidation in Europe is finally under way between Air France and KLM, and Alitalia may join. Creating momentum here is essential: with the pressure that three of Europe's largest airlines can bring to bear, a revised transatlantic aviation agreement may even arrive before the forecast date of 2008 - although it will still take years to negotiate. The year will see more moves towards consolidation, with Lufthansa and (less probably) British Airways heading for mergers with smaller rivals such as Austrian.
Swiss question mark
At its present rate of losses, Swiss International Air Lines, too, may not last out the year, heading either for radical downsizing, closure or a takeover. Its failure so far to find a new backer does not bode well for its future. Its disappearance as an independent player will be mourned by the Swiss, but will, especially in the event of a merger with another Oneworld carrier, help the process of European consolidation.
Air Canada, Avianca, US Airways, United Airlines, Varig and many others enter the new year in dire financial straits. US Airways has pulled itself out of Chapter 11, but United is still trying to cut costs and launch low-cost subsidiary Ted. It expects to leave Chapter 11 in the first half of 2004. Avianca, also in Chapter 11 (it is reorganising under US law because most of its creditors are in the USA), is negotiating with various potential new investors, with a plan due early in 2004. And Varig's proposed merger with fellow Brazilian carrier TAM has been delayed, and may be cancelled if Latin American traffic sees strong improvement in 2004.
But overall, US airlines' losses in 2003 are expected to be less than for the previous year - $5.4 billion compared with $7.4 billion in 2002, according to UBS Warburg analyst Sam Buttrick - and the rising traffic should cut these losses still further in 2004, with JP Morgan analyst Chris Avery predicting net profits by 2005.
Across the Pacific, meanwhile, the established flag carriers may have recovered from the SARS epidemic only to face the new threat from low-cost competition. Virgin Blue has operated in the more liberal Australian market for several years, and although greater distances between east Asian destinations make the high-frequency, low-cost model less useful, several carriers are considering their own low-cost subsidiaries. Higher barriers to entry make independent carriers less likely here than in Europe or North America, but 2004 should still see more no-frills Asian airlines launched.
One of the most startling stories of the last few years has been the sharp growth in Middle Eastern aviation. Despite being at the epicentre of the war on terrorism, despite the Iraq conflict and the economic slowdown, Middle East carriers have reported sharp rises in traffic and responded with huge aircraft orders. But the development of ambitious carriers like Gulf Air, Emirates and Qatar Airways will largely depend on the success of efforts to turn Gulf emirates into tourist destinations.
Source: Flight International
