ALEXANDER CAMPBELL / LONDON

Hopes for upturn pinned on 2004 if airlines can eliminate excess capacity and encourages new investment

Manufacturers, airlines and economists are widely predicting another lost year in 2003, with a recovery seen as unlikely to materialise before 2004 at the earliest.

General Electric is forecasting falling demand for new engines in the months ahead as airlines continue to struggle, with profits and sales at its Aircraft Engines division both falling in 2002.

GE's warning follows Airbus's recent assertion that it faces a "very difficult year" despite it pulling ahead of rival Boeing in aircraft deliveries. "The recovery just keeps pushing back and back," says the US engine manufacturer and maintenance provider.Lufthansa added to the gloom by abandoning its earlier €1 billion ($1.07 billion) profit forecast, and followed up by grounding nine aircraft and announcing it would cut more short-haul routes, blaming continued economic weakness and the threat of war.

Steadily rising oil prices, a stalled recovery and the risk of war are holding back the any upturn for airlines and manufacturers.

A year ago, as the initial shock of the 11 September terrorist attacks receded, forecasts were more optimistic. The Organisation for Economic Co-operation and Development (OECD), which includes 30 leading industrial democracies, predicted a "V-shaped" recovery, with growth returning rapidly to pre-crisis levels. But since then the recovery has faltered, with forecasts from the OECD, the International Monetary Fund and national governments all becoming gloomier.

By August 2002 the IMF had concluded that "growth in the second half of 2002 and in 2003 will be weaker than expected" and warned that "the risks to the outlook are primarily on the downside."

In fact, the OECD believes, the apparent recovery in the first half of the year was a false dawn - the economy bouncing back from the sharp drop in late 2001 - and the true recovery will be slower as surplus capacity is gradually taken up.

Independent aviation analyst Chris Tarry believes that although major carriers around the world responded to the crisis by grounding almost a thousand aircraft, "the outlook remains extremely tough....We still haven't seen enough capacity come out." The glut of capacity means lower load factors and/or yields for the airlines; it also represents a "capital overhang", discouraging investment in airlines and investment in new aircraft by the airlines.

Aviation specialist Dean Gilmour, a director at consultancy PRTM, says: "I don't see anything happening in 2003, and frankly I'm doubting 2004. There is too much capital on balance sheets, and capital is difficult to shift."

The economic downturn will last longer for manufacturers, Gilmour believes. He says: "It will take four years for airlines [to recover], but four years, plus the time to refill the order pipeline for associated industries such as aircraft manufacturing."

He adds: "There are no circumstances I can see today that could put an industry of that size into recovery any faster."

Source: Flight International