Chris Tarry looks at the factors behind the differing pace of recovery. Analysis by Flightglobal Insight
While we might talk about the global economy in the same way as we refer to the airline industry there is, and will continue to be, a wide variation in the past performance and the outlook for individual countries and companies. This is not only in respect of rates of growth but also what are best described as recovery lags and ultimately the length of what will continue to be a cycle. A quick glance through the latest round of financial results for the December quarter shows this very clearly indeed, with a wide variation in performance. It also shows the dangers of generalisation.
Results only tell us what has happened in the past and is akin to looking in the rear view mirror. But it is possible to take a view on the financial starting point. For many airlines it is a difficult road back to profit let alone meaningful profitability. Indeed in North America and Europe analysts are focused on the midpoint of the cycle (2011-12) to derive valuations for airline shares.
Despite the dangers in generalisations, perhaps unsurprisingly I share the view of a number of other observers that the economies in Asia/Australasia and their airlines will for the most part experience a "V" shaped recovery at least in terms of revenue and traffic. Whereas for much of the so-called developed or industrialised world it will be an "L" or a "U" and in a number of cases, there is still the risk of a "W". Even in Asia it is important to guard against bandwagon effects. It is not all plain sailing in a more favourable economic environment and there will likely be airline failures here too.
With the exception of fuel, which is an externally determined and increasingly volatile cost, revenue is the big "swing factor" on cash and profit. Whilst there may be some encouraging signs in respect of future revenues in a number of markets, concerns are beginning to emerge over costs as inflation begins to become an issue again. This includes financing costs, as the weapon of choice in the fight against inflation is generally the rate of interest.
While low interest rates have been part of efforts to prevent economies seizing up, we have already begun to see them move up in some countries. There is also the increased capacity issue, which has the potential to continue to depress fares at a time when costs are rising.
In terms of consumer prices the IMF is forecasting rises of 1.3% and 1.5% for 2010 and 2011 in the "Advanced Economies", the expectation for the "Emerging and Developing Economies" is for consumer price rises of 6.2% and 4.6% in 2010 and 2011.
It is worth considering the economic outlook against the background of the IMF's latest forecasts and comments. Whilst at the level of "The World" the expectation is for total output in 2010 to be some 3.9% higher than 2009 and for 2011 some 4.3% higher than 2010 there is a wide variation in expected behaviour. Within any average there are difference experiences and 2009 was no exception. Of 182 countries in the IMF database 84 are expected to report a contraction of their economies in 2009 of up to 18%. Whereas the remaining 94 expect an outcome ranging from flat to growth of 16%.
As ever we need to look at absolutes as well as rates of change. In this respect in terms of passenger numbers a 1% change for AAPA members is equivalent to some 1.3-1.4m passengers; for the US industry overall 1% is equal to between 7-8 million passengers and for the AEA 1% is equivalent to 3.5 million.
In this respect changing shares at a regional level will be the results of different rates of recovery and growth rather than declines - although within the mature air transport regions as discussed in the February issue of Airline Business, a greater element of growth at an individual airline level may well be the result of a series of substitution effects.
While it is to be expected the actual outcomes will be different from the forecasts, at this stage the main thrust, absent any major shocks, are likely to materialise. All of which adds strength to perhaps what we knew already and have known for some time; the balance of power in air transport is changing geographically and whilst those in growing markets faces a range of challenges and issues, these are even greater and indeed different for those in markets where the fundamentals are "challenging" or just difficult.