Welcome to the latest edition of IATA’s quarterly eAnalyst.
The eAnalyst is designed to provide a concise and insightful guide to the current key issues in the global airline industry.
In this issue we discuss how the continued deep recession and difficulties resizing capacity fast enough have further weakened the outlook for industry profits. Any recovery – when it comes – is likely to face severe headwinds.
Our survey of airline business confidence in July showed renewed pessimism, driven by heavy falls in traffic and yields combined with the prospect of renewed fuel cost rises going forward. Whilst expectations of more stability on the cargo side of the business is good news, airlines are still bracing for unprecedented difficulties over the short/medium term – as reported employment cuts indicate.
Conserving cash will be a crucial part of the survival strategy for airlines and this is discussed by Chris Tarry in our Analyst Viewpoint section. Raising money from capital markets is one measure already taken by some airlines but the window of opportunity for others to do so may not remain open long. Containing costs will also be important and IATA research on infrastructure charges examines the risk of cost increases in this area, highlighting the need for cooperation across the value chain to seek cost efficiencies. The policy issue section features work by the International Energy Agency warning of the longer term implications for this sector and others of the fall in energy investment resulting from the financial crisis and recession.
I hope you find it to be an interesting and informative read.
Brian Pearce
IATA Chief Economist
INDUSTRY PERFORMANCE AND OUTLOOK
Green shoots face severe headwinds
While there may be some signs that we are close to a bottom of the current recession, any recovery will be muted by consumer indebtedness, high inventory levels and rising oil prices. Moreover, while capacity has been cut in some markets, this is not universal and has failed to match the weakness in traffic, putting severe downward pressure on yields, so revenues continue to fall. These factors combined with airlines reporting losses in excess of US$3 billion during the first quarter drive the outlook for the full year of US$9 billion industry losses. While major airlines have stronger cash positions now compared to before the 2001 downturn, many mid-size and smaller airlines may find their cash reserves stretched if recovery is delayed.
Airline business confidence falls back
IATA’s July 2009 survey shows that airline business confidence weakened in the second quarter under continued pressure from the deep recession. Cargo prospects have improved, albeit from exceptional lows, but the passenger outlook remains weak. Respondents report yields having been hit hard and see little prospect of improvement in profitability in the next 12 months. Adding to the pessimistic mood is the view that input cost will rise over the year ahead. Airlines report cuts in employment levels and expect more of the same, underlining the continuing severity of the challenges they are facing in the current economic climate.
ANALYST VIEWPOINT
Raise cash now
by Chris Tarry, CTAIRA
There are many uncertain factors for airline managements to weigh when developing strategy to navigate through the current industry downturn and position for the future. When will the industry recover? What form will the recovery take? One thing is clear however - preserving sufficient cash to continue operations through this difficult period will be critical. While cost saving initiatives can help, Chris Tarry examines raising cash from the markets and indicates that now may be the window of opportunity to do so lest the recession take another turn for the worse.
RESEARCH TOPIC
Infrastructure costs
While airlines have experienced downward movement across many parts of their cost structure due to the recession, the same trend is not evident for the cost of infrastructure services. Research based on latest data from ICAO and ACI indicates that infrastructure user charges paid by airlines and their customers rose sharply during the 1990s recession and may do so again during this recession. The cost of infrastructure services were at least US$54.2 billion in 2007 and estimated to have increased to US$58.1 billion last year, representing 11% of the cost of air transport. All partners in the air transport value chain must seek efficiencies if the industry is to weather this downturn and position itself well for the future.
KEY POLICY ISSUE
The impact of the financial crisis on energy investment
by Dr Fatih Birol, International Energy Agency
The financial crisis and following recession helped lower airline fuel costs compared to their highs of 12 months ago. The flip side of this equation is that energy investment has also declined with potentially serious consequences for future supply – and fuel prices once demand recovers. New capacity of 45 million barrels per day are required annually just to offset declining capacity at existing fields. Dr Birol assesses the impact across sectors as well as on energy security, climate change and energy poverty and suggests that additional government assistance in the order of four times the amount allocated to energy initiatives from recent stimulus packages could be needed to address these challenges.
DATA UPDATE
2009 World Air Transport Statistics Digest and CD ROM
The 53rd edition of the World Air Transport Statistics (WATS) draws from half a century of experience to assemble the key figures of over 250 airlines, including low cost carriers. This represents a complete statistical picture of the airline industry in 2008. WATS is the air transport industry's most comprehensive and up-to-date reference digest, and offers extensive coverage of a wide range of critical industry issues. To make data viewing even easier, an interactive CD-ROM with key performance indicators is now included with the WATS digest.