Just as the performance of world economies march to a different beat, the same goes for the traffic and financial performance of the airlines that make up this industry. There are always leaders and laggards.
Whichever category your airline falls into, for most the traffic decline began close to mid-2008. However, for the US carriers January 2008 was the last month where there was underlying traffic growth. Meanwhile the international passenger traffic of Association of Asia Pacific Airlines members rose until June 2008. Elsewhere, for European carriers although passenger numbers were declining from June 2008, the decline in RPKs began in September and continues.
Although there have been declines in capacity, these have not matched traffic falls. Given that fare levels have also declined, further adjustment in capacity - even when there is a recovery in fundamental demand - must remain at the top of the agenda. To give this some perspective, while Asia Pacific traffic in May was 89% of the May 2007 level, capacity was only down 3% against that month. In Europe, traffic in May 2009 was some 96% of that in May 2007, but capacity was broadly at the same level as two years earlier. The consequences are plain for all to see.
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In early July, the Air Transport Association of America put out a press release with the alltoo telling headline: "Despite airline cost decline in the first quarter2009, industry remains unprofitable". Fuel was inevitably the big swing factor, although labour costs moved up too. And, while the effect on the all-important breakeven load factor was positive, there was still agap of some 4.6% points - a function of adverse average revenues.
One of the real risks as we move into (or in some cases further into) the second year of the downturn is that of statistical illusion, irrespective of whether the shape of the "recovery curve" is ultimately that of a W. While it has to get less worse before it gets better, the temptation is to read too much into reduced rates of decline and more into any positive figurewhich is inevitably seen as growth rather than the first hint of a possible recovery. At the end of the day the trend, if the reported figure is negative,is still down, the market is still contracting and the pressure on cash is even greater. Even the simplest examination of the figures shows the imbalance that exists between supply and demand, as load factors continue to fall in most areas. There has to be a further, and in some cases meaningful, reduction in capacity. This is difficult for management as the point is approaching where such reductions are structural rather than just a cyclical response.
Removing Fixed Costs
However one key problem remains.Grounding capacity may remove the costs associated with operating an aircraft. But unless action is taken to remove the corresponding fixed costs then all that happens is that these have to be recovered over a smaller scale of operations. To reduce these generally takes cash - something that is already under severe pressure. Getting that cash,given the near- and medium-term outlook means addressing the capital and/or debt markets, or approaching governments.
A number of airlines have already done this and there are more to come. However, will investors or lenders be "buying into" a sustainable recovery or just supporting more of the same?
And, given the nature of the continuing market decline, might they have thought that they were buying into a "recovery story" when it turns out that they are funding current and near-term losses? While the best time to raise more money is when you don't need it, the reality is that many airlines have an immediate need and this will constrain the amounts that can be raised.
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Leading aviation analyst Chris Tarry formed independent consultancy CTAIRA in 2002. He writes a monthly column for Airline Business and also lectures at the UK's London School of Economics.
Source: Airline Business
