Market Outlook: Happy New Year?

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Most key economies, the UK being a notable exception, appear to have passed through the trough and are now established on a recovery path. This matters because GDP remains the key driver of traffic volume, but the revenue generated by this traffic is more important still.

A recovery in consumer and corporate spending will have a major impact on the financial recovery of the airline industry, and in particular its ability to generate cash from operations.

Looking at current IATA forecasts, industry revenue for 2010 is set to be some $60 billion lower than in 2008. One of our key concerns for the year ahead is the cash pressures that airlines are likely to face, given both the challenge in generating increased cash from operations and the rising cost of accessing cash from external sources.

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Read last month's Chris Tarry column here 
The latest forecasts for the OECD group of countries, which were released in November 2009, show an unsurprisingly wide range of experiences, both in terms of the extent of the downturn and in the forecasted shape of the recovery.

For the OCED countries overall, real GDP growth is forecast to be 1.9% in 2010 and 2.5% in 2011. In other words, by the end of 2011, the aggregate OCED economy will be some 0.8% larger than it was in 2008.

In the euro area, real GDP growth is forecast to be 0.9% in 2010 and 1.7% for 2011. This means that, by the end of 2011, the euro zone economies will still not have recovered to the size they were in 2008 - and they will need growth of at least 1.65% in 2012 to get there. As expected, there is wide variation in forecast recovery times for individual economies. In particular, Ireland and Spain are likely to still be markedly adrift of 2008's activity levels by the start of 2012. Conversely, in 2011 the US economy is forecast to be almost 3% larger than it was in 2008.

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Given the importance of consumer spending on air travel and therefore on airline revenues, personal spending activity and forecasts - or more to the point "non-spending" - is of interest.

Household balance sheets, in the USA and Europe in particular, have taken a beating and it seems reasonable that people will seek to rebuild these.

Interest rates are low and in many countries there are negative real interest rates for savers. Despite this, the percentage of disposable income being saved is on the up in an increasing number of countries. This suggests a behavioural shift and a desire or need to create a financial buffer, in spire of the "cost".

Whatever the reason or rationale, an increase in net savings, and indeed tax payments, will reduce the amount of spending power in the economy. Given the discretionary nature of air travel, an impact is inescapable.

The OCED data shows some interesting changes in real consumer expenditure. Private consumption in 2009 is forecast to fall 1.1% against a projected 3.5% drop in GDP. Regionally, euro area consumption is expected to drop 1%, with GDP down 4%. Looking to the USA, in 2008 consumption fell 0.2% and GDP grew 0.4%. For 2009 US consumption is forecast to be 0.6% lower, against a 2.5% hit to GDP.

The greatest consumption slumps in 2009 are forecast for Iceland, Mexico, Hungary, Ireland and Spain. And the news is not much better for 2010, when spending will again fall in Iceland, Ireland, Hungary, Spain and the UK. In just four OECD countries consumption is expected grow faster than GDP in 2010: Canada, Denmark, New Zealand and Norway.

This means in 2010 the OECD countries' consumption growth is forecast to be around half the GDP growth rate, increasing to 80% of GDP in 2011. Consumption held up relatively well in 2009 so it is forecast to recover to 2008 levels by the start of 2011.

Using air travel spend in 2009 as a benchmark, you can use the consumption forecasts to make forward projections which show that the rate of recovery is likely to be more modest than suggested by the GDP outlook. In isolation this suggests a relatively weak recovery, even before the impact of excess capacity takes its toll.

For airline passengers, who are likely to get even more for less, 2010 looks like being a good year. But this is unlikely to be the case for the majority of airlines worldwide. Nevertheless, have the best New Year you can.

For more on the prospects for 2010 read our forecast piece here