While we appear to be approaching a turning point in the economic cycle, there is considerable risk ahead. IATA has given its first 2010 forecast, predicting a swing of over $10 billion to a $6.5 billion operating profit next year. But it stresses that the industry remains in "survival mode", adding there is far to go before early signs of rising passenger numbers can be described as a recovery.

Thefear is that the failure rate will step up as we move into winter, 2010 and beyond because of thedangerous mix of anaemic economic recovery, grounded aircraft re-entry and new deliveries which will up excess capacity, making fare recovery impossible.

In some areas there seems to be a more well-founded basis for "green shoots" optimism, with a number of commentators suggesting the recession is over. But this remains a dangerous time. What we are seeing now is perhaps no more than the beginning of the end of the economic downturn. And while all attention is on the timing, pace, breadth and extent of the recovery, this remains uncertain in a number of regions of the world. The latest Eurozone data shows an "unexpected" dip in industrial production in July. Consumer spending elsewhere remains resolutely stubborn.

Statistical illusion is another risk, meaning we have to look beyond year-on-year change to make comparisons. For example, data from the US Bureau of Transportation Statistics shows that domestic traffic in June 2009 was 6% down on June 2008, almost 9% lower than in June 2007 and 5.6% less than June 2005. Load factors stood at 85.4%, compared with 82.3% four years earlier.

Despite capacity cuts, yields are still falling. In August results of a US survey revealed that passenger revenue had fallen 21% in July 2009 against July 2008, comprising a 4% fall in traffic and an 18% fall in yield. There may be agreement that traffic volumes need to go up before fares, but recent load factor increases have been achieved at the expense of fares, making the extent of the task all too obvious.

For almost all full service airlines the fall in premium traffic has been particularly damaging. In its latest "Premium Traffic Monitor", IATA reports that June 2009 premium traffic was down 21% against June 2008. Within this the 14% North Atlantic decline pales in comparison with the 31% intra-European drop, 29% for intra-Far East and 26% on intra-North American routes.

Even the dramatic falls in premium traffic have been accompanied by sharp price cuts. And while there are indications that the premium fare decline rate has bounced off the bottom, in June fares were still 25% down year-on-year. Meanwhile, economy fares were 20% down.

We have already seen a number of airline chiefs, including Tony Tyler of Cathay Pacific, considering the need to rejig cabin sizes and yet again questioning the need for first class.

There is also a real risk of a second downward dip and that, rather than having a V or U shape, this recession may be W-shaped.This means management responsiveness will be central to any recovery in the light of even modest economic improvement. But much of the industry still has the size, shape and structure appropriate to the last cycle, having failed to adjust to the set of rules now emerging.

Despite the measures which have been taken, and even allowing for a modest recovery, the industry still has too much capacity, both in service and in the pipeline. This will only further depress margins. Unless the prospect of excess capacity in the first stages of the recovery phase is addressed, financial returns will remain ever more elusive and the role of many airlines will be to enable others to make money. However while we know what needs to be done, achieving it is quite a different issue.

Source: Airline Business