Gala dinner speeches are usually the last place you expect to hear hard news. But it is a sign of these remarkable times that Abderrahim Zouari, Tunisia's transport minister, chose his address to the recent Arab Air Carriers Organisation annual meeting dinner extravaganza to announce the merger of two of his country's airlines.

In addition to his words of welcome to the assembled guests, praising the work of AACO and congratulating flag carrier Tunisair on its 60th anniversary, Zouari revealed that privately-owned Tunisian leisure carriers Nouvelair and Karthago would combine. This North African move may be tiny in global terms, producing a new carrier with some 20 narrowbodies, but is representative of the strategies many are contemplating as they ponder the very survival of their airlines.

For most AACO carriers, which includes Middle East and North African players, staying power is not in short supply. As Tim Clark, president of Emirates, and someone who has worked in the region since 1975 when he joined Gulf Air, points out, all the names that existed then exist today.

Crystal ball 
  © Joe Partridge/Rex Features
"When it comes to figuring out what 2009 will look like, the crystal ball is very murky"

But in today's turbulent world the normal assumptions of business seem to have evaporated. In the past those who wanted to invest in airlines were mocked. Why, some said, do this when the return is so poor? You would make more profit by simply putting your money into a bank, they said. The mockers won't disappear, but the irony of the effects of the credit crunch, which turned into the credit crash, that banks are a safe haven, is not lost.

It was against the background of the credit crash and what IATA calls "alarming" traffic drops that Arab airlines met in Tunis in late October. It was the first meeting of these chief executives since they had gathered at IATA's own annual event in June. At that time the gloomy mood was down to the price of oil which would ratchet up to $144 a barrel by early July.

Oil prices have since halved. That is the good news. The bad news is that recession is here with a vengeance. And this downturn is different to that which followed the 2001 terror attacks when North America and Europe stumbled, but Asia didn't break step. This time the effect of the credit crash is truly global. Traffic growth is stalling everywhere. In September IATA reported that every major region, with the exception of Latin America, saw traffic shrink.

Most have been looking nervously ahead as they see forward bookings dry up and the warnings of recession grow. And most agree that when it comes to figuring out what 2009 is going to look like their crystal ball is very murky. New York-based airline analyst at JP Morgan, Jamie Baker, confesses that "never in our careers have we had such difficulty modelling losses".

The dilemma is that no one knows with any certainty just how bad things are going to be. That plays havoc with setting budgets and deciding on strategies for next year. The volatility of the price of oil has already caused havoc for those who hedged some of their fuel at around $110-120 a barrel when it hit the $140 mark. That seemed a wise move at the time. Now, with the welcome news that oil is falling below $70, some are rueing another painful blow on the fuel front.

However irritating this is, it could pale into insignificance compared to worries about where the money comes from next year. The final dreadful picture of the credit crash will only be drawn when banks close their books on 2008 with more losses possible. The impact on aviation is profound and AACO leaders sounded a grim warning. "The cost of capital will increase by 15-20% and there be very little access to funds," says Akbar Al Baker, chief executive of Qatar Airways. "The capacity of banks to lend to airlines will clearly diminish."

This all adds up to what IATA head Giovanni Bisignani calls the "perfect storm" and the association is warning that its loss forecast for this year may well have to be revised downwards again. The frustrating part is that there are no clearcut answers to riding out this storm or to knowing how long and vicious it will be, yet.


Source: Airline Business