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Market Outlook: Load factor limitations

Chris Tarry stresses that load factors are only a measure of capacity utilisation.

Stabilisation has become a recurring theme among earning and traffic statements, based on passenger load factors returning to former levels. Indeed, the 77.1% international load factor for September is just 0.3 of a point down on September 2007. But one set of figures does not make a trend and, on a year-to-date basis, the 2009 figure of 75% is some 2.3% points adrift of 2007. Equally, load factor is merely a ratio of capacity usage.

Aside from fuel, revenue is the key airline performance "swing factor". Growth is needed for non-fuel unit costs to fall and a number of airlines have warned that the lack of growth will have a detrimental impact on their unit costs into 2010.

On the supply side, the number of parked aircraft in September was 2,600, 750 up on September 2007. And, somewhat predictably, an increasing number of older aircraft have made their way to desert storage and the breaker's yard over the last year.

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Read Chris Tarry's column on why airlines doing less worse does not necessarily mean they are doing any better
Less visible has been the change in daily utilisation and IATA's most recent analysis says "average daily hours flown are down for some aircraft" and there will be an impact on unit costs.

If we look back to our two-year starting point,utilisation is 4.5% down for short-haul and 5.5% lower for long-haul aircraft. In other words aircraft are being retained, but used less. This suggests that the load factor headlines are overstating what has occurred. Load factors only measure the use of capacity offered to the market, rather than overall utilisation of the total productive capacity of the industry.

Using labour market terms, these aircraft are the "hidden unemployed". The airlines are hoarding capacity, which is not good for industry efficiency. But this reflects the cost and difficulty of adjustment, as well as a hope that the current "bumpy ride" won't last too much longer. But any thought of increasing utilisation when times get better will only add further pressure to capacity, pricing and revenues once things begin to pick up.

What lies ahead?
It's now the time of year where we take a view on what might lie ahead. Looking at demand,GDP remains a key traffic growth driver, but in this downturn traffic growth rates have fallen, rather than just slowing.

Most, but not all, major economies have passed through the trough and although economic activity has not yet hit previous levels, the slope of the rate of change in GDP is again positive. Likewise, for airlines the rate and direction of traffic shifts are important, but recovery to previous levels is more important still.

Despite the more positively shaped GDP curves, there is still a risk of the recovery stalling, with inevitable consequences for all sectors. What's more, airline demand is influenced by external events and the Economist Intelligence Unit identifies the possible reaction to Iran's nuclear programme as a potential threat to US outbound tourist traffic.

When it comes to price and mix, new capacity is the key determinant. During the initial stages of the early 1990s recovery,capacity discipline was evident and new aircraft delivery rates were modest. But this time we are facing hoarded capacity and high 150-seat delivery rates. In terms of mix, we would be surprised to see much, if any, loosening of corporate travel budgets, leading to possible cabin rethinks.

When it comes to cost, fuel remains the great unknown. At a recent industry conference, the majority of attendees believed that in twelve months oil will be$81-100 a barrel, while Boeing sees a range of $61-80, compared with today's price of around $80. Away from oil, the challenge is structurally reducing costs.

While profitability is often the focus, perhaps all that matters is cash. And we fear that, for many, 2010 will be even more challenging in terms of generating cash from operations than 2009.

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