Market Outlook: Beware of the recovery

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This story is sourced from Airline Business
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Although some economies appear to be on the mend, Chris Tarry questions if it is true recovery. Analysis by Flight Insight

France and Germany have said their recessions are over. But their 0.3% GDP growth for the last quarter appears to be below the margin for statistical error. Also a single figure is not a trend.

With the June quarter reporting season now coming to an end, it is worth looking not only at the results, but also at how management view their performance, near-term issues and outlook.

Examining financial results is like looking in the rear view mirror of a car. They show us what has happened and give an indicationof events threatening to overtake us. This time there were few surprises. While unit revenues may be close to "bottoming out" in markets such as the US and Asia, there are no indications of "when a sustained pick up will begin" (Cathay Pacific).

Generalisations are dangerous and although one or two low-cost carriers have reported improved results,it is fare revenues which indicate the state of the market rather than the impact of lower fuel prices. There is now increasing recognition that although the current "downturn" had cyclical origins, it will have a number of structural outcomes. Corporates may undergo a behavioural shift, impacting premium revenues, and the airline sector may have to face structurally lower, and even less attractive, financial returns. It is now recognised that the upturn in premium traffic will lag economic recovery and will not reach previous levels.

There are signs of structural change on the supply side too. Low-cost carriers will be looking to attract premium traffic to shore up their unit revenues, offering fares which significantly undercut the full-service carrier "premium" cabin. Their success will depend on closeness of substitution, in terms of timing, frequencies and network, and this may have implications for how they address the corporate market.

In future it appears a number of airlines will face structurally lower returns and their performance will be even more closely linked to the vagaries of the economic cycle. This will present significant challenges, necessitating further adjustment.

While most airlines have announced planned capacity and staff cuts, one of the clearest signs of how tough life has become is the additional SKr2 billion ($280 million) cost cutting plan revealed by SAS Group just five months after its fundamental Core SAS strategy was unveiled.

The term "survival" has cropped up in management reports, but some of these messages are clearly aimed at unions. As summarised by Continental Airlines: "The most difficult changes will be the employee reductions that we are forced to make throughout the company."

Aircraft groundings are generally a "least worst" measure as they only cut variable costs. But we are seeing a dawning realisation that earlier capacity plans are no longer valid. Airlines are now taking action to cut future aircraft deliveries. In its interim statement Lufthansa notesthere have been 160 deliveries postponed across the industryin 2009. This was further evident as Cathay Pacific saidit is working to defer some deliveries. AirAsia has pushed back around eight aircraft in 2010 and 2011, andBritish Airways revealed delays on itsBoeing 787s deliveries.

As analysts say, "downside risk" remains. For some the challenge will be survival. For others it will be surviving in a form which enables them to benefit from recovery when it comes.

But, as ever, airline industry finanical recovery will lag most others because of the ability of this sector to adjust meaningfully and quickly enough is negligible

With the northern hemisphere winter ahead and no signs of when a sustained pick-up might occur, it is likely to get more difficult before it gets easier...despite the first real, or illusory, signs of better times ahead.