ANALYSIS: GDP growth will deterine airline performance as market improves

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As the market continues to improve, it is important for airlines to hold on to the changes and gains made in more difficult times. Although economic data remains mixed, the broader operating environment is better than it has been at almost any time over the past four years. Some airlines clearly continue to face potentially overwhelming challenges, where survival, rather than competitive prosperity is the main item on the agenda, while others with large order backlogs and small balance sheets will inevitably change earlier plans. In both cases, opportunities exist for other airlines.

For the most part, economic theory assumes rational behaviour. The actions considered irrational by the management of one airline probably are indeed irrational in the context of a competitor’s particular circumstances. For example, airlines with a lower cost base can take a different view on how long they are prepared to sustain losses on a route – quite rational in the eyes of the particular airline taking the action. Given that airlines mostly operate in an open environment, it is the actions of competitors, and particularly changes in their behaviour, that will continue to have a more significant impact on short-term revenue performance than internal changes.

The rules of economics apply to the airline industry just as much as they do to any other industry. The ideal position, when it comes to pricing and revenue is that there is relative excess demand at the fare/passenger revenue levels, which are contained in the budgets and financial plans. Changes in capacity also reflect tactical and structural changes, as well as a response to a short-term variation in economic activity – a position reinforced by the time between orders and deliveries. The nature of the relationship between GDP and both traffic and revenue has changed, but it is the rate of change in GDP that remains a key determinant of performance.

We have reviewed the expected increases in capacity for a number of key markets and there are some interesting outcomes, particularly in what might be regarded as the more mature markets. According to research association The Conference Board, global GDP in real terms in 2014 is expected to increase by some 3.5% over 2013. Meanwhile, the latest data from DIIO shows the total number of seats offered by airlines in 2014 increasing by 4.8%, and available seat kilometres by 6.3%.

Within this total, where eurozone GDP is forecast to grow by 1%, compared with a decline of 0.3% in 2013, the number of seats to be offered on intra-EU services is shown as increasing by 4.9%, with ASKs expected to grow 7.1%. Of the 501 airports covered in the DIIO data, 288 show an increase in the number of flights, three show no change and 210 show a decrease.

Within the group reporting growth, Brussels Zaventem airport shows an increase of almost 11,000 flights, followed by Rome Fiumicino, with just over 9,300 and Barcelona with just over 8,200. In the case of Brussels, this reflects recent decisions made by low-cost operators Vueling and Ryanair. Conversely, when it comes to new intra-EU destination/origin routes, there is only one: Albert-Picardie, with 121 round trips forecast in 2014.

Turning to the USA, where GDP is forecast to grow by 3% in 2014 compared with 1.9% in 2013, the number of seats offered on intra-US services is expected to increase by some 1.7%, and ASKs by 2.8%. This represents a continuation of the trend for modest expansion which, despite the cost pressure warnings issued by some US carriers, is favourable in terms of the potential supply/demand relationship. Internationally, the number of seats on EU-US services is expected to increase by 8.1%, with ASKs up 8.5%, while on routes to and from China and Hong Kong, seat numbers are expected to grow 19%, with ASKs up 19.8%. By comparison, EU to China and Hong Kong routes show increases of 5.4% in seats and 3.6% in ASKs.

Returning to internal markets, against an expectation of GDP growth of 7% in 2014 versus 7.5% in 2013, seats for the intra-China and Hong Kong market are expected to increase by 8.8% and ASKs by 9.6%. With the developing markets in the intra-Indian market, where local GDP is forecast to increase by 4.4% compared with 4.2% in 2013, airline seats offered are expected to increase by 5.2% in 2014 and ASKs by 5.8%.

Looking further east to Indonesia, where real GDP is expected to be 5.6% in 2014 versus 5.2% in 2013, the number of seats offered on domestic services will be 6% higher, with ASKs increasing at the slower rate of 5.7%. For flights where Indonesia is the origin or destination, seats are expected to increase by 8.7% and ASKs by 13.7%.

The expansion of the Gulf carriers continues unabated, with the impact felt both on routes that are not operated and those generating all-new traffic, as well as on routes where an intermediate stop is required. North America is clearly seen as a market of opportunity, with a planned increase in seats to and from the UAE of 22.9%, and 22.8% in ASKs. This will have an inevitable impact on the volume of traffic connecting across Europe to South and Southeast Asia; in terms of seats, it represents an additional 800,000.

Elsewhere, growth in seats between the EU and UAE is expected to be 11.4%, which is a similar rate of change to the number between China and the United Arab Emirates. In the case of flows to and from the EU this represents an additional 3.4 million seats, while on routes to and from China and Hong Kong it represents just 400,000.

While generalisations are dangerous, in most markets the passenger will continue to benefit. As a result, it is not surprising that the most recent IATA Business Confidence Survey showed a decline in the percentage of respondents expecting yields to increase over the next 12 months compared with the number that had seen yields increase in the previous three months. Just over 70% of respondents expect a decline or no change over the coming year. This not only underlines the importance of cost control but also the importance of not giving up the gains that have been made against more difficult backgrounds.