There should be little doubt that the industry has now moved into the second phase of a downturn in performance as the effects of the economic slowdown and the problems in the banking and related sectors spread to almost all areas of activity. Indeed, there is now evidence that regions that were thought to be immune will not escape - most recently concerns have been raised over financial stresses that are facing Dubai.
At a recent conference in London, AirAsia's management referred to the need to "mitigate demand destruction". The latest figures from China show that traffic has declined since May, and the airlines' financial results show no regions are immune. In India, another structurally strong market, the consequences of excess capacity are clearly evident from the announcements by Jet and Kingfisher. In Europe, the market continues to weaken and there have been sharp falls in premium traffic at British Airways (down by over 8% in September) and elsewhere, according to IATA. And in the USA, great store has been placed in the announced capacity cuts, but only time will tell whether they are successful.
Just over two years ago, at the time of the 2006 Farnborough air show, there was great excitement as a number of observers suggested that the industry had entered some type of "golden age" in the form of a super-cycle. It was rather like politicians saying they had put an end to boom and bust.
For the record, I did not share the view that the industry was in a prolonged upswing phase which would be a characteristic of such a cycle (of course there would also be a corresponding downswing). Similarly, I do not believe that economies are anything other than cyclical.
At the Commercial Aviation Outlook conference in June, a view was expressed that the market would adjust, which it undoubtedly will, but that adjustment will be painful as it will involve risk transfer. Adjustments to any new set of circumstances, no matter what the industry, are never instant or costless.
While there have been aircraft order announcements of late from American, Ryanair and Turkish Airlines, the nearer-term issue is the ability to fund the orders in place. Given the turmoil in the banking industry and the reticence of bankers to lend to each other, it rather begs the question of how much and at what price funding might be available to acquire aircraft.
New deliveries are not the only issue on the supply side. As airlines seek to adjust to their "right" levels of capacity, there is also the issue of the planned and unplanned return of aircraft to lessors. Irrespective of whether the return is planned or unplanned, the real problem now is the appetite of the market and the price at which these aircraft can be returned to the market. In theory, given the greater risk of the airline industry, lease rates should be higher to reflect this. However, the issue is to find the market clearing price at which the aircraft can be placed, or the rate at which a return might be avoided. The need for the lessor is to keep aircraft in airline service and generating a return - the opportunity for a lessee is the leverage that they have to achieve a low cost of capacity.
Whether this is a challenge or an opportunity depends upon who you are, where you are and will also reflect previous decisions. What the current environment also underlines is the need not only to focus on operational issues, but also still to have a strategic view. Over the next 18-24 months opportunities will emerge in all sectors of the industry, but even more than usual it will be necessary to have a very clear view on the industrial, commercial and value implications of any potential acquisition, given the change in the financial rules of engagement.