The industry has clearly passed its peak. Now the question is how precipitous will the decline be and will the downturn finally spur consolidation in North America? And who will swoop in and buy into carriers as their stock prices continue to fall?
The view from a peak can be inspiring or, depending on the perspective, frightening. The airline industry, a veritable range of steep peaks and deep valleys, is now tumbling down the slope from its recent peak. The question becomes one of how steep the incline and how precipitous the decline.
For years, optimistic industry watchers talked of the super economic cycle, an extended upswing driven by emerging markets like China and India and the enduring strength of Europe's and America's mature markets. That view is frankly now discredited. The truth is the cycle just keeps on turning.
That the industry is past its peak is beyond debate: IATA has already ratcheted down its profits forecast for 2008 and in the USA even the more sanguine analysts have turned gloomy. In fact US market watchers are now using the dreaded "R" word - recession. Phil Baggaley, the Standard & Poor's airline analyst, says that S&P economists put the chances of a US recession at 70%,
Whether the downturn officially becomes a recession is merely playing with words. At the time of writing, words too were the single most tangible output from the weeks of merger talks this year between Delta Air Lines and Northwest Airlines. The shake-up offered by this ground-breaking deal, and the other combinations it might spur such as American-Alaska or United-Continental, is profound for the US industry. Whether it comes to pass in 2008 is an open question.
Most observers see as significant the comments made by Northwest chief executive Doug Steenland that oil at $105 a barrel "is a serious budget-buster" for his carrier and indeed all airlines. Steenland heads the industry's Air Transport Association this year, and that casts his thoughts as reflecting a wider view than just a forecast from wintry Minnesota.
Some believe that this slide will be different. Surely, they argue, a turgid US market coupled with cripplingly high fuel prices will conspire for deal-making to finally occur? Many believe that Steenland was hinting that oil prices will rekindle consolidation talks toward cost-cutting mergers. In addition, some believe that the airlines have shown that they can control themselves in times like these.
Arthur Calavritinos, the John Hancock mutual fund manager who happens to hold a significant stake in Northwest, says: "The airlines have shown a lot of capacity discipline and the executives at big legacy carriers have the financial backgrounds and discipline to do more of this capacity control. They'll adjust."
Investors too have adjusted their expectations of the industry. Airline stocks have performed poorly, generally down by half or more from this time a year ago. The irony for many is that sluggish airline share prices come just after some posted their best profits for several years. As investors get twitchy, the private equity sharks that circled the business a year ago have been frightened off too. This leaves those with a strategic view of the industry, like Air France-KLM or Lufthansa, among those willing to take a gamble on another carrier.
There are always dangers whether investing at the peak or in the trough, but as Robert Milton, chairman of ACE Aviation and the architect of the break-up of Air Canada, says, it is all a question of timing. "Despite always being a dire business, [airlines] can be a good investment," he says. Milton should know having bought US Airways shares for $15 each during its restructuring and selling them nine months later for between $50 and $60 each.
The conclusion is that opportunities to buy into carriers that become distressed in 2008 will appear as the market softens. The other option is to let the weak fail and swoop in to grab market share when gaps emerge. Both types of behaviour can be expected during the descent.
Finally, as climbers know well, the correct gear to tackle mountains is absolutely essential. Unfortunately the right equipment for airline leaders to handle the market slide is harder to find: you can't buy deep pockets off the shelf for instance. As the industry enters the valley, before the year is out expect some airlines to be reaching for an item of equipment climbers often rely on: the oxygen bottle.
For a daily diet of views from our Washington-based Americas editor David Field, visit his blog Left Field at: flightglobal.com/leftfield
meet idris jala
The subject of our cover story this month, Malaysia Airlines chief executive Idris Jala, is also a keynote speaker at this year's Airline Business/UATP organised Airline Distribution conference taking place in Kuala Lumpur in late April. For more details of how to see Idris in action see the advert on page 29.