Market Outlook: 20:20 hindsight

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In this column last month we discussed the way expectations condition our actions and future behaviour, making the dynamic aspect of changing expectations particularly interesting and important.

Just as our own recent experiences are likely to condition how we behave in the near- and longer-term, the same is true for company management; expectations form the basis of assumptions for forecasts and change programmes too.

The rapidly evolving market place makes it almost impossible to forecast for any longer than a few months; yet this is the time when management want, and need, optimum visibility. In reality, keeping abreast of the actual situation involves changingforecasts on an almost weekly basis.

In April IATA published its Business Confidence Survey, setting out airline managers' outlooks for the next twelve months, and comparing it with the experience of the last three.

While the survey data seems to show a less pessimistic view than before, there is hardly widespread optimism. As with anything, it has to stop getting worse before it can get better.

Taking the inevitable statistical caveats into account, it is interesting to track how expectations have changed over the last year, and then use them as a proxy to forecast outcomes. This forecast can then be compared with average reported outcomes.

Comparing expectations from April 2008 with the four reported quarters to April 2009-although not perfect-provides a big picture perspective, highlighting both the rapid pace of change and how reality can differ from expectations around 12 months earlier.

This experiment reveals that forecasting in times of rapid change is a nightmare, highlightingthe difficulties that forecasters and planners face.

April 2008's results showed 61% of respondents expected profitability to deteriorate over the next twelve months (half had posted actual profit declines for the previous quarter). And averaging actual quarterly outcomes for the year to April 2009 shows 77% did suffer lower profits.

This year, 42% expect profits to fall over the coming 12 months, even though 74% posted reduced profits for the last quarter. Conversely, in April last year, a third expected higher profits, yet our averaged approach reveals only around a sixth achieved this.

Unsurprisingly, in April 2008, when fuel prices werestill climbing, just under 6% expected "unit input costs" to fall, but reality shows a third managed this.The vast majority, 83%, expected costs to rise. This was the case for 60%, butcosts rose for only 15% in the most recent quarter.

Turning to revenues, last year 71% expected stable or higher passenger yields-which is not far off our actual average of 63%. But it seems optimism is dwindling this year; some 84% expect yields to stay flat or fall (in the most recent quarter some two thirds reported declining yields).

Just over a fifth of the April 2008 sample predicted a drop in cargo; the actual outcome was 41%. Now almost 60% give a negative outlook, with83% experiencing a fall in the last quarter.

This is the real world and not a lab experiment. Adjustment is neither instant, nor costless, and there is still a way to go. There is always a lag, andsome 40% expect employment to fall over the next 12 months, compared with a fifth reporting a decline in employment over the last year.

This is short-term, and you cannot neglect the longer-term view, particularly in fleet planning. Near-term aircraft deliveries are almost universally difficult, but what about the longer term?

As the Paris air show nears, we will track the news, "mood music" and delivery dates with even more interest than usual. But given this year's orders so farwe are not anticipating too muchin the mid-week of June.