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ANALYSIS: Industry malaise grows after difficult 2011

At this time of year there is cause for reflection on the past 12 months and thoughts of what might occur in the next. To say 2011, after the record industry profits in 2010, has been "disappointing" is a huge understatement. The year became more difficult as it progressed and 2012 will, for many, be tougher. For first time IATA has published a forecast range for 2012 rather than a single estimate. This is a rapidly changing environment where the only real issue is how far from reality the current forecasts prove to be.

Fundamental economic problems remain to be resolved in key geographic areas and here the attempts by policy makers to "buy time" so far in many cases have exacerbated the underlying problem rather than even beginning to solve it. So, it is difficult to be upbeat about underlying traffic growth within Europe and outbound from Europe in particular and some contagion is inevitable. However, this is not the only issue and despite, or maybe because of, the environment it is hard to recall a time when so many airlines were in effect "in play" and seeking new investors. But it is important to remember that often the best deal is "no deal".

A number of airlines face problems and not only AMR, with its recent entry into Chapter 11 to reset its economics. This wider group includes those where managements and boards appeared to believe consolidation would establish them on the road to at least salvation with, among other things, so-called synergies providing the route to a structural improvement. But here, and elsewhere, we see a bid to focus attention on the medium-term to (at least) 2015 and beyond.

Despite the uncertainty there has been a lemming-like order-fest since the announcements of the Airbus A320neo and the Boeing 737 Max. As in Europe a decade ago, Asian airlines are vying to be awarded the accolade for having made the biggest order. Clearly the strength of underlying economic growth in many parts of Asia and its performance against a wide range of economic indicators suggest a growing market for air travel in volume terms.

However, in all cases price needs to be considered whether in respect of the rate of penetration of those goods seen as indicators or economic development or air travel itself. We have 37 economic-related indicators we use to identify the potential for air travel from a volume perspective, but in many cases the opportunity diminishes once you consider the actual or likely air fare and how much of it will fall through to the airline.

Furthermore, there is the issue of financing near term as well as longer-term deliveries. Attention has focused on the role of export credit agencies and manufacturers as providers of finance to fill what could be a widening gap.

The opportunity clearly arises as "new homes" are sought for aircraft already in production as the original intended buyers are unable to take delivery - there are deals to be done.

We expect the capacity adjustments in the winter through fleets being flown less, to also be a feature of the summer in a number of regions. But these short-term actions do little to address the pressures relating to excess supply. There will, however, come a time when retirement rates step up and the fact that GE Capital Aviation Services now has a business to "part out" aircraft is a powerful signal of how it sees it might capture or retain value from its portfolio.

Recently, we have seen references to asset values in balance sheets. That is fine, if there is a willing buyer and seller, and ideally, a degree of competitive tension. But in the current environment the issue is the extent of the "discount for distress".

Perhaps most importantly the message for 2012 is to stick to what you know best and it is interesting to see Finnair was cited in Monocle magazine's top 50 travel awards for being a "consistent" airline.

The operating environment cannot be described as "steady state" and there is the need to do everything to make the outcome less worse. But there is also a need to ensure nothing is done to compromise the ability to recover when the upturn comes, as it surely will. The problem is we have no way of knowing at the moment when it will come.

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