The industry is still falling and there is no sign yet that the bottom is in sight. That is the unequivocal message from the six heads of the regional airline associations that represent the world’s leading carriers – interviewed by Airline Business in the days running up to this year’s IATA Annual General Meeting.
Any talk of green shoots of recovery is premature. “We do not know when the downturn will bottom out,” says Ivan Misetic, chairman of the Association of European Airlines. “Passenger volumes are in steep decline and the air freight market has suffered what can only be described as collapse.” he says, after gauging opinion at the AEA spring presidents’ assembly in late May.
“This industry didn’t have any breathing space to forget the last crisis, even a little bit,” notes Abdul Wahab Teffaha, secretary general of the Arab Air Carriers Organisation. Predicting when the recovery will begin is extremely tough, says Alex de Gunten, director general of the Latin American and Caribbean Airlines Association.
At last year’s meeting the central theme was soaring fuel prices, although there were worries about worsening economic conditions too. Since then, the effects of the global recession have caused IATA to continually revise its forecasts. In March it further downgraded its outlook, predicting that losses will reach $4.7 billion in 2009, almost double the $2.5 billion loss it was anticipating in December.
But there are major regional differences. While Asia Pacific, Europe and North America have all been badly hit, carriers in the Middle East and Latin America are not seeing such huge traffic falls.
Asia Pacific: Worst affected?
Airlines in Asia Pacific were slower to feel the impact of the downturn, but have arguably been the worsted affected.
“We have felt the brunt, more so than the USA and Europe,” says Andrew Herdman, director general at the Association of Asia Pacific Airlines which represents 17 of the major carriers in the region.
He explains this is because most major Asia Pacific carriers rely heavily on the market segments which have been most adversely affected: cargo, premium travel and long-haul services.
Herdman says international cargo traffic was the first to feel the impact of the downturn, and will be the first to recover along with short-haul leisure traffic.
Short-haul leisure trips can often be an impulse buy so people respond well to price promotions, says Herdman. Business traffic and long-haul leisure traffic will take longer to recover, he says, adding that “people don’t make impulse buys for long-haul trips”.
Herdman declines to say when the recovery in long-haul travel will begin, because it depends on when the North American and European economies recover.
But he says there are signs Asia Pacific airlines have passed the bottom. For the first four months of 2009 AAPA members’ international passenger traffic fell “just under 10%”, but for the month of April it was down 6%. “That is one of the signs there is some relief but one month’s figures is not enough,” he notes.
“We have passed through the worst, but it is still very tough,” he says. Last year AAPA member carriers posted $4.3 billion in collective losses, compared with a profit of $4 billion in 2007. The AAPA has a policy of refraining from giving financial forecasts, but clearly another loss is likely this year.
Europe: A new cycle
In Europe the outlook is bleak, with no signs of recovery. Figures for the first half of May are “the worst yet”, says Association of European Airlines secretary general Ulrich Schulte-Strathaus.
He adds: “Any talk of when we will reach the bottom is pure conjecture”, noting that the financial picture is even worse.
External costs are high – and in many cases still rising – as service providers look to shore up their dwindling revenues. Meanwhile premium traffic is “well down”, eroding airline profitability. Suspension of the “use-it-or-lose-it” slot rule will bring airlines some relief, but the AEA chief is also calling on the regulators to act on external costs and “open up avenues of institutional investment funding, as [airlines] face their own credit crunch”.
AEA members tracked around 6% passenger growth until the end of 2007, when the trend fell into decline and stabilised at roughly 3.5% until June. But from mid-2008 figures began to slide once again, going negative from September onwards.
The consensus among AEA airline chief executives during the recent spring assembly in Brussels was that market conditions are showing no indication of when the recovery might begin, and the impact of the downturn is expected to continue well beyond 2009.
AEA chairman and Croatia Airlines chief executive Ivan Misetic describes the economic downturn as “unprecedented”. He adds: “This is not a cyclical feature in an industry which is used to business cycles. It is a structural upheaval, and we must adapt structurally.”
North America: Under pressure
As the timing of an economic recovery remains anyone’s guess, Air Transport Association of America chief executive James May believes pressure on carriers will continue through 2010.
May explains once the major indicators of traffic and fares “point north”, a timeline for an industry rebound should emerge. However, he cautions, “at this point we don’t see any of the indicators pointing north”. While some chief executives expressed highly cautious optimism that fares could be stabilising during the release of their first quarter results, ATA chief economist John Heimlich says those sentiments were expressed prior to the onset of the H1N1 virus.
Heimlich believes May’s US carrier results are therefore likely to be worse than they otherwise would have been. “We don’t see any indication of a flattening yet,” he says. “We’ll be anxiously monitoring May and June data.”
As US carriers try to craft strategies to sustain their businesses during the downturn, ATA chief executive May says it is getting more difficult to find “meaningful cost savings in the equation”, since airlines have already done a great deal to streamline expenses.
ATA already predicts 14 million fewer passengers travelling during the peak summer season as the weak economy continues to pressure demand.
An indicator of just how difficult the operating environment remains is shown by US carriers deciding against reinstating services to markets which they cut last year. Some of those markets are significant; Heimlich highlights that both American and Continental no longer serve Oakland.
Even as Southwest Airlines introduces four new markets in 2009, Heimlich says that is being achieved via the redeployment of aircraft, and the carrier’s autumn schedule actually shows a 9% reduction from the prior year.
Middle East: Growth path
“For this region the crisis is not in terms of RPKs, it is in terms of the yield we are getting from our passengers,” said Abdul Wahab Teffaha, secretary general of the Arab Air Carriers Organisation.
The Middle East is the one region that has remained in positive growth territory almost throughout the past year. It only fell back in September last year and climbed back to 11% growth in April. Traffic within the Arab world has remained healthy, with the VFR, business and religious market segments holding up.
In addition, most Arab countries have not fallen into recession. “These cushions have dampened the impact of the crisis,” said Teffaha. Those suffering the most in the region are the carriers heavily involved in global traffic flows, while other have been less exposed as they concentrate on point-to-point business.
Although profitability will be stretched this year, “there is no single instance up to now of any Arab airline asking their government for money because of the crisis”, says Teffaha. “What we are asking governments to do is make it easier for us, for example reduce user charges and taxes.”
Based on the first part of the year, Teffaha believes the region could end up with overall growth of 5-6% for the year as a whole.
Latin America: Positive feeling
“I think the expectation is that by the end of 2009 we will go back to positive numbers,” says Alex de Gunten, director general of ALTA, the Latin American and Caribbean Airlines Association.
The only exception to this will be Mexico, which has been hit hard by traffic drops following the swine flu outbreak.
Latin America was one of the last regions to see traffic drops, with growth rates only turning negative in February.
“The GDP of the region is still positive, which means we are going to have positive traffic growth,” says de Gunten.
“Our economies have been doing relatively well politically and financially. The region is more stable than it has been for years,” he adds. “The economies are also less connected to the US than 10 years ago. This has isolated us a little from the crisis.”
Add these to the fact that in some countries air travel is still in development mode, means the mood in the region is “still not as pessimistic as in other parts of the world”, explains the ALTA chief.
Mexico will however take longer to recover. This market, which represents around 30% of the region’s total, has been the worst performer. Traffic was falling even before the flu outbreak, and yields had been plummeting.
Africa: Recipe for recovery
African carriers, represented by the African Airlines Association, have not escaped the downturn.
AFRAA president and LAM Mozambique Airlines chairman Jose Viegas says: “By and large airline profitability has been quite poor in the first quarter of 2009, with a downturn in traffic and a fall in yields, which have not been offset by the benefits of lower fuel prices and capacity adjustments.”
He adds that the world financial crisis will “most certainly hit African airlines during 2009”, causing record operating losses and significant budgetary constraint.
“According to IATA research, Africa will be hit by losses of up to $300 million in operating results and $600 million in net profits,” says the AFRAA president.
“Neverthless, Africa hasn’t plummeted to the bottom line yet. Traffic volumes forecast a pick up from the third quarter of 2009, in line with preventive measures already taken, the outlook of a slow recovery of the world economy and tourist market uplifting, which is an important factor in our business,” notes Viegas.
He is also optimistic that the 2010 World Cup will help boost tourism, increasing passenger and cargo revenues in South Africa and neighbouring countries.
“Southern African airlines are facing an unprecedented crisis. In the last 12 months alone, some have filed for bankruptcy. The lack of cash flow has hit the region’s so called ‘big brothers’ too.”
He says the commercial aviation is “under pressure” and “shaky”, creating an urgent need for partnerships.
Viegas is also backing stronger regional relationships, “energising” of some hubs, flight schedule co-ordination and other commercial co-operation as key ingredients in any future recovery.
Across the globe, and in Malaysia, the search for the green shoots of recovery continues.
Report compiled by Leithen Francis in Singapore, Lori Ranson in Washington and Victoria Moores and Mark Pilling in London
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