Pierre Jeanniot, director general of the International Air Transport Association (IATA) has issued a stern warning to airlines to think twice before expanding their fleets.
The warning follows evidence from IATA that international airlines last year failed to repeat their record profits performance of 1995. The net result on international services shows a net profit of $4 billion, down from $5.2 billion in 1995, and representing a return of less than 3% on sales.
The 1996 result was at the bottom of IATA predictions which had suggested a range of $4-8 billion depending on what happened to the balance of yields, costs and capacity. In the event , yields fell faster than projected at 2.5% and airlines managed to keep costs down by only 1%, in part due to the battle with soaring fuel prices.
Jeanniot admits that early figures suggest that capacity growth of around 7.1% stayed roughly in line with a 6.9% growth in international scheduled passenger traffic, but cautions that airlines cannot afford to let the gap widen by cutting loose on capacity.
"It is easy to buy aeroplanes. It is harder, but perhaps smarter to not buy aeroplanes," he told delegates at the IATA financial management conference in New York on 18 March. He urges airline chief executives "at the very least" to insist on modernising rather than simply expanding fleets. IATA's early predictions for 1997 show only a slight profits recovery to $4.2 billion.
Jeanniot's warning follows predictions from US lessor, International Lease Finance (ILFC), that the next industry downturn is likely to strike by mid-1999, although it will not be as deep as the recession of the early 1990s.
"The next downturn is as sure as death and taxes, but ILFC believes it will rise as a result of increased costs which will affect the airline's bottom line," says ILFC executive vice president and chief operating officer, John Plueger. "Wage demands will lead the parade," he adds Plueger citing the on-going battles at American Airlines and US Airways.
"The good news is the downturn will not be as severe or rapid because the replacement need is great," says Plueger. According to ILFC some 4,000 old aircraft, including more than 1,000 "first generation" widebodies will need to be replaced between 1998 and 2003 when they are between 25 and 30 years old.
This period straddles the next downturn which is expected to begin in mid-1999 and continue through 2002.
Source: Flight International
