The airline industry experienced significant changes in 2008, prompted initially by high fuel prices, which peaked at close on $150/barrel in July last year, and a marked overcapacity in the market. This already tough situation was exacerbated in the second half by the credit crunch and a near collapse of the financial system, which plunged the world into a downward spiral of recession, with no clear signs of imminent recovery. The plummeting stock market has wiped billions off the capital value of airlines, with their values halved compared with early last year. It has also limited access to capital markets.
According to the International Air Transport Association, airlines lost up to $8 billion in 2008, far more than the $5 billion estimated previously. This marked differential is accounted for by much greater than expected losses of more than $4 billion in the fourth quarter of the year, as the severity of the credit, financial and economic crises accelerated.
Although IATA's early forecast for this year's performance painted an improving picture - projecting losses of $2.5 billion - an update issued in March 2009 nearly doubled the expected deficit, to $4.7 billion.
The association expects a 12% drop in revenues for the industry to $467 billion and saysthis is far greater than the 7% dip experienced in the post-September 2001 crisis.
Director general Giovanni Bisignani says the industry is in a "grim" state and demand has deteriorated "much more rapidly" than previously anticipated. "Combined with an industry debt of $170 billion, the pressure on the industry balance sheet is extreme."
Passenger traffic is expected to fall by 5.7%, with premium traffic dropping more sharply, while cargo demand will be down by 13%. Yields will fall by 4.3%.
"Fuel is the only good news," says Bisignani, who addsthat total fuel expenditure will drop to $116 billion and fall back to 25% of operating costs."But the relief of lower fuel prices is overshadowed by falling demand and plummeting revenues. The industry is in intensive care."
European airlines have used the instrument of fuel hedging to good effect in the past, which has enabled them to minimise losses. But being now locked into relative high costs in US dollar terms against the backdrop of a sharp slump in fuel prices has turned the tables.
Asia-Pacific carriers, which account for 45% of the global cargo market, were particularly hit by the 5% fall in cargo, and will suffer further as the decline is set to continue. Japan is already in recession, and slowing exports from the main markets of China and India will have a major impact. The negative effect of the downturn in the US economy will continue to make an impact on Latin American carriers, while falling demand and growing capacity is set to challenge airlines in the Middle East. Fighting off increasing competition from outside the country is the main occupation of Africa's airlines.
Bisignani says the outlook is bleak, but adds: "A crisis is painful, and change never easy, but we must use it as an opportunity to drive change that builds a more solid future for this great industry."
Changes are being implemented and range from consolidation, to more determined measures of cost control, such as a slimming down of the workforce and reductions in capacity through taking older aircraft out of service, and cancelling aircraft orders and delaying deliveries of new aircraft until the operating environment recovers.
The fog has lifted a little from the merger merry-go-round in the USA, with Delta Air Lines acquiring full control of Northwest Airlines, creating the second-largest carrier in the world after American Airlines. Flight schedules and frequent-flyer programmes have already been co-ordinated and full integration will be completed within the next two years. United Airlines and US Airways called off their merger talks in May due to concerns over labour opposition and integration costs, but United signed a pact in June with Continental Airlines, which allows for the consolidation of the international networks of both airlines, as well as the sharing of technologies and passenger benefits. This "virtual merger" is said to provide many of the benefits of a real merger, but without the restructuring costs. However, a full merger remains a distinct possibility.
American Airlines, British Airways and Iberia concluded a joint business agreement in June, covering flights between North America and Europe, and enhanced worldwide co-operation. The three airlines have applied for worldwide antitrust immunity from the US Department of Transportation. Under the joint agreement, the three airlines will co-operate commercially, while continuing to operate as separate legal identities. Also part of the antitrust immunity requests are Royal Jordanian and Finnair, both members of the Oneworld alliance.
BA had also been initiating full merger talks with Iberia and, briefly, Qantas, but, after delays over pension deficits and share ownership, BA chief executive Willie Walsh has indicated that the merger with Iberia is imminent. The aim is to create a single parent company, with BA the majority shareholder. Both airlines are to retain their individual brands.
The survival of Alitalia, long in doubt, has been assured with a strategic partnership signed in January 2009, under which Air France-KLM will take a minority 25% stake in the restructured carrier. The deal has still to be approved by the competition authorities. The partnership will be based on a multi-hub strategy focused initially on Paris Charles de Gaulle and Amsterdam Schiphol, and strengthened by the introduction of Rome Fiumicino and Milan Malpensa on an equal basis.
Lufthansa, which already owns Swiss International Air Lines, has finally got its hands on Austrian Airlines, completing its control over Europe's German-speaking nations. However, EU regulators are examining whether the sale and restructuring of Austrian conforms to EU rules on state subsidies. Lufthansa is also set to increase its influence at London's Heathrow airport, after BMI founder Sir Michael Bishop exercised his option for Lufthansa to acquire his majority holding in the airline.
There are signs that the airlines of the Gulf states, which had appeared to be defying the global economic slump that hit every other region, are also feeling the pinch. A slowdown in the tourism and property sectorshas resulted in falling traffic and rescheduling of aircraft deliveriesfrom recent huge orders.
Indian airlines are showing resilience, although a codeshare deal between Jet Airways and Kingfisher Airlines, the two largest private carriers, suggests the start of consolidation to combat falling demand. Elsewhere, airlines are tightening their belts and planned start-ups are taking a more measured approach, awaiting a return to normality. On the positive side, there have been no major failures - yet.