Stability has yet to return to the US market and the threat of war still looms. Chris Tarry looks beneath the current confusion at economic drivers.

Any discussion of long-term traffic trends may seem a little academic in a US market dominated by so many urgent threats. But at least some of the issues with which US carriers are now struggling have their seeds back in the trends that have been developing over years rather than months.

In the near term it is true that the market will continue to be dominated by more immediate uncertainties over the risk of war and the likely response of travellers. Back in 1991 when war last dominated the agenda, the number of US citizens travelling to Europe fell by 27%. By contrast, European, residents flying to the USA increased by 10%.

This time, in the wake of the US terrorist attacks, the picture appears more even. Latest available figures for the first half of 2002 show a fall of 14% in the number of US citizens travelling overseas, and a 19% decline to Europe. Over the same period, there was an overall 16.5% fall in non-resident arrivals in the USA, and a 12.5% decline in arrivals from Europe.

Aggregate traffic figures from the US Air Transport Association (ATA) and the Association of European Airlines (AEA) suggest a similar outlook. For ATA airlines, passenger miles were down by 3% last year on the North Atlantic against 2001 and by 11.2% against 2000. For the AEA carriers the outcome was 7.6% and 20% respectively.

An area of great debate is the extent to which there will be a further fall in traffic if and when war or terrorist action returns. The latest household survey shows that 90% of US consumers are "somewhat or very concerned" about the possible threat of terrorism to air travel whether inside or outside the USA. Until there is a behavioural acceptance of the new travel environment this nervousness is likely to continue to show through.

Yet while behavioural factors may overwhelm in the near term it is important not to neglect the longer-term influence of economic activity on travel. Despite the present turmoil, there is clearly still a link between economic growth, in terms of GDP, and underlying market demand. The question is when that link will resurface and at what rate. In the past couple of decades traffic has continued to run ahead of GDP growth, but largely at the expense of yields.

So over the 1992-2000 period, domestic US traffic had been growing at an average multiple of 1.34 times GDP growth. For international traffic the multiplier was higher at 1.56 times based on ATA historic data. However, in the four years between 1997-2000 these multiples were on the decline, sinking to 1.11 and 1.17 respectively

As suggested in the past, what really matters is profitable flying. On that score, US industry margins were at their highest in 1998 when the GDP multiplier was at its lowest point for both traffic and domestic capacity growth. Perhaps a case for arguing that the multiple has been kept artificially high over the past decades and that a better target would be to shoot for traffic growth at par with GDP or even less.

The latest OCED forecasts suggest growth of 2.6% in 2003 and 3.6% in 2004 for the USA. Taking these expectations and on the unlikely assumption that other things would be equal, then the implication is that underlying demand in the domestic market ought to be in the 2-2.5% range. This figure, however, needs to be applied not to the 2002 outcome but rebased against the levels of 1998 when the industry was last in balance as discussed last month.

The outcome on this basis would be that 2003 domestic traffic would still be 2% below the traffic levels reported in 1999. The reality of what is likely to be reported clearly depends on what are referred to as geopolitical developments. However even in their absence it is clear that the outlook for the US domestic market remains exceptionally tough.

Internationally, while there has been rapid expansion of services to and from the USA, it seems reasonable at this stage not to expect significantly faster underlying traffic growth overall in the current year. Near term it could get far worse before it gets better.

Source: Airline Business