As talk of recovery grows, Chris Tarry of Commerz-bank looks at the underlying trends of loads, yields and traffic for the US and European majors.

On the surface, the industry is beginning to right itself after the trauma of last year. The decline in traffic is more manageable and there is hopeful talk of a return to normality. Yet that begs the question of what "normal" now means after the fundamental structural changes that have been taking place in the market.

Some clues come from an analysis of the first quarter yield data which is available for the majority of US and European majors. Furthermore, carriers have been giving indications for the expected trends in yield for the summer, although only time will tell whether there is a gap between expectation and reality.

There also remains a transatlantic divide. In the USA there are real signs of doom and gloom. Yet in Europe there is, for the most part, a realistic view that there will be a continuing modest improvement in load factors, but that revenue is likely to remain pressured.

The rate of decline in international travel for the US airlines has continued to slow. Despite a dip in April, passenger numbers for May were down by just 5.8%. However international traffic, measured in revenue passenger kilometres (RPKs), was 10.6%lower reflecting the continuing trend for shorter international trips. In April the average fare for a 4,000 mile (6,400km) round trip was just 2.1% lower than the year before but 6.4% lower than April 2000.

In the US domestic market, passenger numbers were 13.1% lower in April and 10.8% lower in May but with RPKs down 10.7% and 7.9% respectively, it is the reverse of the situation in the international market. The implication is that domestic sector lengths are increasing as travellers use alternative modes for the shorter journeys. Fares were 11.9% lower for a 1,000 mile round trip.

Since the start of 2001 there has been an average reduction of 2.9% in the trip length for international passengers, compared with a 1.8% increase in the trip length for domestic passengers. Since September the change has been more marked, with the international trip length falling by 5.5% and the domestic increasing by 2.5% - but this is hardly a surprise. Both of these factors will have an impact upon the structural yield.

Of course, moving into September and beyond, the headline comparisons will become more favourable. Against this background it is important to avoid statistical illusion. Mathematics dictates that a fall of 20%, for example, needs a recovery of 25% to get back to normal. And although it may be positive to see a slowdown in the rate of fall, the market is still declining.

It is also worth remembering that even before 11 September, last year's figures were hardly a high point. In judging whether the industry is returning to "normal", 2000 might be a better comparison. For example, there have been some suggestions that the experience on the North Atlantic this summer will be similar to last, yet that was already the worst year for a decade. Travel on the key US-UK market in summer 2001 was already declining - down 3.5% in August.

A more telling measure comes from looking at the movement in breakeven load factors. For the US majors they have been adverse, ranging from 3.1 percentage points at Southwest through to 19.2 points at American Airlines.

On the European side of the Atlantic, the picture was a little mixed in the March quarter. KLM's breakeven load factor deteriorated by 6.1 points, while at BA the fall is estimated to have been just 1.7.  In terms of yield, BA achieved a 6% improvement in revenue per available seat kilometre (albeit reduced to 2.8% when changes in the value of the euro are applied) whereas KLM experienced an increase of 4.6%.

For the Europeans overall, apart from the Nordic airlines, the improvement in yield has been positive. However, given the capacity cuts, this is perhaps not unexpected - the real issue though is how higher costs per ASK have fed through into breakeven load factors.

We have argued many times that even a return to "normality" whenever it may occur, is not enough for the industry. The industry faces a structural change in fares that is becoming increasingly evident. A combination of the low-cost carriers and recession has led to a re-calibration of customer fare expectations and the resulting compression of the fare structure will add pressure on breakeven load factor for all carriers.

The outlook is clearly better than it was, but remains tough and we are among the bears, forecasting industry losses this year of some $10 billion.

Source: Airline Business