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Market outlook: Let the facts do the talking

We have often written that generalisations are dangerous, and against a background where some analysts are talking about there being black and grey skies ahead for a number of airlines, it is important to keep a sense of perspective. If this outlook was entirely unexpected, it would be a concern. However, managements at those airlines dependent on the progress of the northern and western hemisphere economies are already talking about the crisis at hand. Furthermore, it is not as if they have not seen most of it before and do not know how to react.


Since last month's column, we have seen marked gyrations in the world's stock markets, and although falls have been in the order of 10% since the end of July, the perception is that they have been far greater. Stock markets are considered to be forward-looking, but while the fear that results from uncertainty has been in the ascendancy, there will come a point where shares again appear cheap and a turning point will have been reached.

The key question is whether the affected economies will ratchet down again for a "double dip" and contract from where they are, or, whether (as is more likely) that there will be another round of economic stimulation.

Such actions will, as they did before, in effect buy time for some of the fundamental issues to be addressed. In this respect, the USA has already announced a package worth some $450 billion and the go-ahead for another package in the UK has been signalled, and where these countries have led, others will mostly follow. However, for some countries in the eurozone, there will be real challenges and issues that still have to be solved. Against a background where the accepted wisdom is that what happens in the cargo market is replicated in the passenger market, the latest data from IATA for July shows a decline of 0.4% in cargo. At a regional level, AAPA report a 4% fall in FTKs for July and a 3.4% decline for the year to date. The AEA (where the latest data is for May) reported a decline of 0.6%, while at an individual airline level, we have seen a wide range of experiences.

In Europe, IAG and Lufthansa FTKs were down by some 2% and at Air France by 0.2% in August. In the case of some of the US airlines where significant decreases were reported (American -9.2% and United-Continental -17.2%), the impact of Hurricane Irene was evident.

The latest passenger data shows traffic at an industry level up by some 6% in July year-over-year and a similar amount for the year to date. If cargo continues to be the leading indicator for what happens in the passenger segment, then the inevitable conclusion is for at least slower passenger growth in some markets.

But here, generalisations are particularly dangerous. There are few concerns over the economic outlook in much of Asia and South America (Asia has the added benefit of a decline in the impact of inflation, which has been a real issue for the past 18 months or so) and there is also the consequence of the forecast 6% increase in capacity for 2012. Of course, it will depend on where the capacity is deployed, but as ever, there is the potential for self-inflicted financial damage.


For some airlines, the outlook is undoubtedly for darker skies than in 2010; however, this is hardly unexpected. Responses by airline managements to difficult times are well practiced, and if the economic outlook in the struggling economies becomes more difficult and is not offset by further economic stimulus, then there is the potential for the oil price to fall. This would be helpful, but it is unlikely to make up for the reduction in revenue that would result.

However, care needs to be taken that those in the northern and western hemisphere economies do not talk themselves into the second leg of a downturn. At the moment, what is being forecast is a slower recovery, and in this respect 2011 still looks to be a turning point. At the risk of being boring, it is important to highlight the need to ensure that capacity matches fundamental demand. The chief executive of a major European airline described the situation well when he said at the recent UBS conference, "capacity is the key in this industry, and it has not been as disciplined as it should have been". Here we wait to see what might happen.

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