The true shape of the industry in the wake of the 11 September attacks is becoming clearer a little clearer, reports Chris Tarry at Commerzbank Securities
With the June-September financial reports and most of the October traffic figures now in, it is possible to gain a better perspective of the post-11 September environment. Whether that gives a better guide to what the future holds is still uncertain, but at least in business planning terms it perhaps sets a base level.
It was entirely predictable that fallout from the crisis would concentrate on the US market and the routes that touch it. Nevertheless it is clear that the consequences of the attacks will be more widespread than those of the Gulf War a decade ago and the recovery is further clouded by the onset of an economic slowdown at best and a recession at worst.
The figures from IATA for international scheduled traffic showed that the month of September was down 17% for passengers with a fall of 7% in seat capacity. That left load factors down from 78% in August to just 69% in September. Within this figure, North America was 30% down, with Europe and the Far East 12% lower. For the nine months through to September this resulted in zero growth for the year overall.
The pattern for US airlines has been much as expected, although in Europe the weekly figures now being published by the Association of European Airlines (AEA) show an interesting pattern. The pattern on the North Atlantic traffic, now stabilised at 30% lower, was predictable. But the impact on intra-European and Far East traffic is of interest. The weekly rate of decline in traffic to and from these markets appears to have increased since the week of the attacks.
On an individual basis there have been selected traffic figures for October for the European airlines: Air France -10.1%; British Airways - 24.7%; and KLM - 17.7%. In particular, the North Atlantic was down 31% for BA and 34% for KLM with a knock-on effect for its European feeder network.
October figures from the BAA airport group support the picture: overall passenger numbers down by 12%, with Heathrow some 20% lower than a year ago. Geographically and not unexpectedly, the North Atlantic is 31% lower. Ireland is the only growth market, up 5.5%, against the background of an 11% fall in European scheduled traffic. This has, of course, given rise to a debate as to whether Terminal 5 is needed now that it finally has approval. The answer is that the terminal is indeed necessary, but then so too is a new runway in the south of England.
However, there is a more serious underlying point about the need to adjust to new travel requirements and to a new travel environment. The issue centres on the speed of adjustment, which in large part is a reflection of a combination of a number of behavioural and psychological factors.
The lower-cost segment in Europe has seen little difference, although as with mainline carriers, the financial figures that have been reported only have the latter part of September in the "new environment". For these airlines the extent to which already low fares may need to be cut as a market stimulus in these circumstances remains open to debate and will clearly provide the data for a number of empirical studies on price theory with a behavioural overlay.
We can of course speculate on the nature of a recovery in traffic. This would seem to suggest the stimulation of the leisure market and a dependence upon economic recovery to act as a catalyst for a recovery in the business market. However, change was already visible in the business travel market before 11 September. Inevitably, a key question is whether this represents a structural change in the market? Will video-conferencing make the long-heralded breakthrough? Will the world be able to manage with less business travel? Who knows?
Aircraft capacity in the affected markets has been cut and the rate of decline in traffic in most markets appears to have recovered from the worst levels. However it still remains to be seen whether the cuts made so far are enough and here the intuitive view is "I don't think so". There is also the issue where capacity cuts have been announced, reflecting the change against what had previously been forecast in the future. The first thoughts relating to the summer 2002 programme should become evident following the IATA slot scheduling meeting but it is impossible to gauge now what will be needed for the period from the end of March to the end of October. One thing that is certain is that a sudden or premature in-rush of capacity that has been withdrawn from service would have damaging consequences.
We watch to wait and see what final form the "son of Sabena" may take and if DAT can be used as a vehicle for Belgium to have a more appropriately sized national carrier. Similarly, we watch to see just how many aircraft and routes will be in the "Airlines of Switzerland" timetable. Consolidation also occurs through market exit - whether partial or whole.
There are, of course, a number of other issues that have been debated in these pages over the last months and years and these too are brought into sharp relief. It is the world and not just the airline world that has fundamentally changed. The fact that some of the financial results for the quarter ending 30 September may have been better than expected matters little. It is the still uncertain and largely unpredictable future that is important and this is well recognised by the airlines which have by and large preferred to decline from making full-year predictions for the current year.
In reality, however, if there is satisfaction on the liquidity front, attention has now moved to 2002 and perhaps beyond. There is an opportunity for the airline industry against this background of very painful adversity to "grasp the moment" and emerge structurally stronger.
Source: Airline Business
