Chris Tarry examines how this year's available seat growth will bode for the industry. Analysis by Flightglobal Insight
While rising oil prices once again have the potential to affect industry performance in early 2011, another more or less ongoing "fear factor" is new and returning capacity. To get fare increases to stick, demand needs to exceed supply at any fare level.
More than a decade ago, we adopted our so called TDI, or "traffic deficiency indicator", to examine the extent of excess capacity in a market. This works by looking at the gap between "fundamental demand", driven by economic activity, and capacity.
During the downturn some aircraft were taken out of service and stored, but lower utilisation was also used to make significant capacity cuts. By simply cutting back flying, capacity can rapidly be returned during the upturn.
Combine this with new deliveries, plans to accelerate production rates in the 150-seat segment and the arrival of the Boeing 787. This all suggests there will be a step up in capacity going into the market.
This does not present a problem, so long as demand is growing at the "necessary" fare levels and/or costs are stable or falling. But even the most cursory glance of future schedules and cost trends rings some alarm bells.
Weekly SRS Analyser data for March 2011 shows ASKs will be more than 9% higher than in March 2010. This is against a background where cost pressures are already in evidence and forecast to persist. Indeed, IATA and others expect a significant increase in non-fuel costs - equal to 4% of 2011 revenues or some 75% of the forecast increase in revenue for 2011 compared with 2011.
Even before the latest fuel price increase, the industry's fuel bill was forecast to rise by more than $17 billion, equivalent to 2.8% of industry revenue or some 50% of the revenue increase. Worse still, several commentators suggest the price of oil will continue to rise, with inevitable consequences.
Looking behind the capacity headlines, there are early inklings that a trend may be emerging. Comparing the first three months of 2011 with 2010, the industry will grow 8.6% in January, 7.9% in February and 9.4% in March.
Meanwhile, although Europe is likely to avoid a double dip, the outlook in most countries remains uncertain. Discretionary spend - the big volume kicker for airlines - is likely to be under pressure through a combination of caution and declining real incomes. The latest forecasts suggest 2011 euro-area GDP will grow at a rate of 1.6%, with private consumption increasing less than 1%.
Although an improvement in consumer confidence may well be the key to a meaningful increase in traffic, perceived affordability is also an issue and here it is not just the air fare but the total trip cost that is important.
Notwithstanding this, intra-European capacity in March 2011 is planned to be some 7.3% higher than in March 2010; Europe-US up by 10% and Europe to South-East Asia up by some 9.8%. At the same time Europe to the UAE will increase by 11% and Europe to Qatar by a quarter.
This suggests there will be some attractive fares on offer (which there are already) and that fare sales will last longer, if only to assist with cash inflows. Airlines with the lowest costs and deepest pockets will be the beneficiaries.
Away from Europe, US airlines appear to be maintaining their discipline. Domestic capacity for March 2011 is forecast to be just 2.7% higher than in March 2010. Here, GDP in 2011 is expected to increase 2.7% over 2010 and consumer spending will contribute some three-quarters of the increase - which appears to bode well for airline revenues.
Turning to Asia, capacity within South-East Asia will be 15.5% higher in March 2011 compared with a year earlier. Here GDP growth is expected to be 5.4%, slightly down on the near 8% forecast for 2010 - which included a significant recovery element - but South-East Asia still offers meaningful structural growth.
Taken together this reinforces what we already knew: too much capacity, too soon, has the potential to be financially painful at company level. At industry level it will further separate structurally growing airlines from those where growth is more a reflection of cyclical recovery.
But there are always exceptions and we continue to watch with interest what may be a structural change in the US airline industry and a transformation of the economics as a result of a meaningful adjustment in capacity. We will not be watching this alone.