Kevin O'Toole Continuing fall-out from Asia's economic crisis reverberated around markets last year as is clear from the latest passenger airline rankings. But it is concerns over falling yields rather than traffic that are now taking centre stage.

Last year posed something of a test of resolve for airline managers. It is at this stage in the cycle, that the temptation to fight for market share has historically won against the duller virtues of capacity constraint.

As hardened campaigners know to their cost, it is also at this point, after a couple of years of buoyant demand and profits, that it is worth keeping a weather eye open for the vagaries of the world economy. True to form, the industry had to face the consequences of spreading malaise in the Asian economies.

A glance along the figures in the latest ranking of the top passenger airlines, shows that the industry came through a testing year better than many had feared, albeit with sufficient pressure on yields and load factors to keep the pessimists worried. At the half-way stage in 1999, those concerns are growing.

The passenger ranking

First, perhaps, the ranking itself deserves some explanation. For nearly a decade Airline Business has run a Top 100 ranking, including group financial and airline operating data. The growing complexity of the data and for that matter of the industry itself, suggested that the time was right to split the two.

The result is a ranking of individual airline operations ordered by revenue passenger kilometres (RPKs). Full details are given for the top 100 airlines, with key data for another 50. That only represents part of the Airline Business database, managed by sister on-line service Air Transport Intelligence (ATI). So for the purposes of overall analysis, the top 200 airlines have been taken - a group for which statistics are fairly reliable and which represents well over 90% of world passenger traffic.

Analysis of this group 200 suggests that capacity did indeed run ahead of demand during 1998, but not by much. Load factors edged down by half a point or so, slipping below the 70% mark, leaving the industry close to the best it has ever achieved. That came despite relatively modest traffic growth around the 4% mark, down from the 6-8% that it has averaged over the previous five years when Asia was still booming.

The damage done to Asia-Pacific traffic is clear from the passenger rankings. Overall, the region's carriers managed traffic growth of little over 2% last year. Load factors also slipped by two clear points as new aircraft continued to come on stream. The fall could have been greater but for some crisis measures, including Korean Air and Asiana slamming on the brakes.

While local airlines suffered, the western carriers made an impressively orderly retreat from Asian markets early in the year. Traffic flow data from the International Air Transport Association (IATA), suggests that load factors between Europe and Asia actually picked up over the year, although they slipped by nearly three points on the transpacific routes as US-Japan traffic suffered.

At the outset there were dark warnings that the capacity would have to turn up elsewhere and so it has. The transatlantic already began to show signs of overcapacity in the second half of 1998 after having hit an incredible high over the summer with load factors above the 80% mark.

As Asia faded, it was South America which took up the lead with passenger growth rates of above 7% for carriers in the region. Capacity and traffic were also both up by double digits on North-South American routes and across the South Atlantic as others joined in. European carriers too notched up traffic growth above 7%, although not quite achieving the stellar 10% of the year before and suggesting that the boom was beginning to flag.

The strain was bound to show and in the second half of the year as passenger yields in Europe, South America and beyond began a steady decline which has threatened to turn into a collapse on key routes so far this year.

Virtually all of the European majors registered sharp falls in their 1998 yields through a heady mix of weakening premium traffic and excess capacity. Not unexpectedly Sabena tops the list after its hectic 36% growth, but British Airways and Swissair came close. Both quickly moved to relaunch premium products.

The evidence this year is that there may be worse to come, especially on a transatlantic market which is heavily oversubscribed. BA and KLM have moved gently to slash away at capacity after last summer's salutary lessons and others are joining them, but such moves have not been universal. For the first half of this year, the Association of European Airlines (AEA) was still showing a cumulative 7.8% growth in traffic but a 9.2% rise in capacity on international services. Transatlantic routes, both north and south, lead the imbalance.

The stress in Asia speaks for itself. Cathay Pacific's yields collapsed by 19% and others too were close to double digit declines. The market now appears to be recovering some of its balance, with traffic running comfortably ahead of capacity so far this year, but yields may take longer to mend.

The US majors arguably fared best in their capacity restraint. Despite the trauma at Northwest and weakening in the second half, load factors were stable in 1998 and overall yields slipped by only 1%. The first half of this year has seen yields slip further but the US industry seems ready to make a concerted effort to stem the trend and get back to the virtuous circle of capacity restraint and stable yields. Perhaps others might watch and learn.

Source: Airline Business