This Month's Feature

The World Airline Report

The airline industry has weathered a stormy year, marked by the swiftest and broadest economic collapse since at least the early 1970s, a spate of high-profile accidents, soaring jet fuel prices and historic losses by both LCC and legacy airlines.

Air Transport World, July 2009, p.24

A BAD TIME WAS HAD BY ALL. THAT about sums up the past year for the airline industry. It was a period during which pride and confidence in a steadily improving safety record were shaken by a spate of high-profile accidents and incidents around the globe; airlines experienced their own credit default swap moment by investing heavily in fuel hedges, the perils of which few of them truly understood; governments in Europe and the US moved forward with plans to impose massive new costs in the name of the environment, and some US politicians sought to turn back the clock on aviation globalization.

It was a period bracketed by the highest prices for jet fuel in the postwar era and the outbreak of a new strain of influenza that scared henny-penny politicians and a jittery traveling public already leery of spending on air travel. It was a year of bad fortune that did not discriminate between LCC and legacy airline: British Airways posted the worst loss in its history and Ryanair experienced its first annual deficit since it went public 20 years ago. Cathay Pacific fell into the red for just the second time and AirAsia lost money as well. Southwest Airlines posted three consecutive quarterly losses, ending a profit streak dating back to 1991.

It was also a period that witnessed the swiftest and broadest economic collapse since at least the early 1970s. This last fact above all is ruling the industry outlook. "There is no precedent for today's economic meltdown," IATA DG and CEO Giovanni Bisignani declared at the organization's 65th Annual General Meeting in Kuala Lumpur in June. World GDP could shrink 2% in 2009. US manufacturing production levels have plunged 16% and the US economy is forecast to shrink 3.1%. GM and Chrysler are in bankruptcy. In its 2009 annual report, IATA noted that "the 15%-30% declines in economic activity in major economies worldwide dwarf those of all previous recessions of the past 40 years."

According to preliminary ICAO data, worldwide RPKs rose just 1.3% last year (0.8% for IATA members), the slowest growth since 2002. International RPKs climbed 3.4% but it was mostly profitless growth and airlines of the Asia/Pacific region experienced no growth at all. Freight tonne-kilometers declined 1.2%, also the weakest performance in seven years.

Airfreight tells the story. During the first quarter of 2008, international FTKs rose at a rate of 5% over the year-ago period, but growth turned negative in June 2008 as the price of oil became too high to lubricate the gears of the global economy. By December, IATA was reporting a 23% year-over-year decline in FTKs. Fuel prices had plunged 70% from July peaks, but credit had disappeared, Lehman Brothers was bankrupt and consumer confidence was in the cellar. "The scale of this decline is unlike anything experienced before by the industry," IATA noted.

Airfreight contributes around 10% of global airline revenue and a third or more for many carriers in the Asia/Pacific region. But of course it is only one part of the problem. Passenger revenues have collapsed as well. At the AGM, Bisignani noted that following 9/11, revenue declined 7%, from $329 billion in 2000 to $307 billion in 2001 "and it took three years to recover." This year, revenue is forecast to sink by 15% or $80 billion to $448 billion from $528 billion in 2008. Passenger demand will contract 8% to 2.06 billion from 2.24 billion in 2008. ICAO, meanwhile, is forecasting a 3.8% decline in RPKs, although the drop will be steeper for North America and the Asia/Pacific region.

Worse Than SARS

"The collapse in revenues is unprecedented," IATA Chief Economist Brian Pearce said at the AGM. First-quarter 2009 results from 50 airlines revealed $3.27 billion in red ink, worsened from a loss of $1.41 billion in the year-ago period.

"These are perhaps the most difficult trading conditions any of us can remember," remarked Cathay Pacific Airways CEO Tony Tyler, who has been with the carrier long enough to have experienced several crises.

IATA recently widened its loss forecast for 2009 from $4.7 billion to $9 billion with an operating loss of $1.7 billion. But although the picture is very dark, a full-year deficit of $9 billion actually would represent a 13% improvement compared to 2008, when IATA estimates the industry lost $10.4 billion. Asia/Pacific airlines contributed $3.9 billion to that figure while the Middle East shed $1 billion, Africa $0.2 billion and Latin America $0.7 billion. Europe muddled through with a $0.4 billion profit.

North American carriers (effectively US airlines plus Air Canada and WestJet) bore the brunt of the red ink, losing $5.1 billion excluding the impact of mark-to-market fuel hedges and special items. Separately, the Air Transport Assn. put the loss for the entire US airline industry at $9.46 billion based on data filed with the US Dept. of Transportation.

Perhaps the oddest twist is that these same US airlines will go from worst to first in 2009. The primary reason is well understood: They began making the hard decisions to downsize in the spring of 2008, ahead of the recession, owing to the soaring price of fuel, whereas Asian, Middle Eastern and European carriers were better able to manage their exposure owing to stronger currencies, fuel hedges and healthy international traffic growth (ATW, 1/09, p. 26).

Also, US airlines are less dependent on international premium-cabin travel that plunged 19.9% in the first four months of 2009 for IATA carriers (and 26% for travel within the Far East). Additionally, US airlines simply are more experienced at dealing with this kind of thing: They were hardest hit by the traffic declines following 9/11 and went through their own revenue shock after the dot.com boom ended, when US spending on air travel as a percent of GDP fell from historic levels and never recovered.

Finally, in desperation, US airlines started charging for things like hold baggage and priority seating and discovered a wellspring of revenue with few costs assigned to it. An airline will be fortunate to pocket $15 out of a $150 ticket, but nearly all of a $25 bag fee flows to the bottom line. According to the US Dept. of Transportation, the 10 airlines collecting the highest amount in baggage fees pocketed a total of $566.3 million in the 2009 first quarter, more than four times the $122.6 million collected in the year-ago period.

That is not to say they are not hurting. Passenger revenue for the big five network carriers plus Alaska Airlines and JetBlue Airways was down 21.1% in the first four months of the year and the top eight excluding Delta/Northwest lost $1.9 billion in the first quarter (ATW, 6/09, p. 63). But as recently as April, US Airways CEO Doug Parker was suggesting that in aggregate the industry could be profitable this year (although this appears less likely today in the face of rising fuel prices and with the auto industry in shambles).

IATA is forecasting North America will lose $1 billion this year while Europe drops $1.8 billion and the Asia/Pacific region $3.3 billion. Airlines of the Middle East are expected to lose $1.5 billion while Latin American carriers lose $0.9 billion and African carriers $0.5 billion.

Government In Action

Although most of the problems plaguing airlines originated elsewhere, governments have shown no inclination to ease their burden. With the exception of China, none has ridden to the rescue and even Beijing's financial efforts focused on preserving the major state-controlled carriers. Governments like to pay lip service to the importance of commercial aviation to the global economy, but don't walk the walk. Commercial aviation helps drive $1.14 trillion in economic activity and contributes $692 billion per year to US GDP, according to FAA, but there was no TARP money for airlines devastated by last year's speculative oil bubble. A fraction of the cash spent to save the banking and automobile industries could have funded biofuel investment for decades and provided gold-plated air traffic management for the whole world. It did not happen.

However, governments always are ready to pile additional fees and taxes onto air travelers regardless of the financial impact. IATA data show that the industry's tax bill covering the 2008-2012 period rose $6.9 billion. The UK's new distance-based Air Passenger Duty takes effect this November and will raise ticket prices an estimated £2.46 billion ($3.7 billion), climbing to £2.72 billion from November 2010. The administration of President Barack Obama would like to make US aviation pay all of its ATM and regulatory costs through user fees and taxes with nothing coming out of the general treasury. US carriers estimate their current tax burden at $17.9 billion, although of course most of this is charged to customers with airlines acting as the tax collector. Lurking not far down the road is the EU's Emissions Trading Scheme, for which airlines must begin preparing next month. And a massive fuel tax is being contemplated for US carriers under environmental legislation being considered by Congress (ATW, 5/09, p. 24).

To the burdens of the taxman must be added the costs of dealing with what IATA calls monopoly suppliers, primarily airports and air navigation services providers. Data from ICAO and Airports Council International show that airlines and passengers spent $54.2 billion on airport and ANSP charges in 200711% of revenue. The figure rose by $1.5 billion last year and another $1.5 billion in the first six months of 2009, Bisignani claimed. UK's CAA has approved an 86% lift in charges at London Heathrow for 2008-13. At a time when India's airline industry is losing millions of dollars, Delhi and Mumbai airports increased charges by 10% this year and introduced new development fees, he said.

Eco-Limelight

If there was a bright spot last year, it was commercial aviation's progress toward reducing its environmental footprint. People may argue whether pending inclusion in the ETS was the stick that made it happen, but with very little external funding the industry swiftly has demonstrated that second-generation biofuels can be a safe, drop-in replacement for fossil fuel and that up to 10% of the fuel requirement could be available within the next 10 years with the right kind of stimulation of these infant industries.

Airlines should not be expected to invest in refining technology or to hire experts in sustainable agriculture or to become land barons. There is a role here for government in partnership with the private sector.

But carriers are investing in new technology that will hasten greatly the transition to more efficient and greener satellite-based ATM. Continuous descent arrivals can save 150-630 kg. of CO2 per flight. Qantas launched Required Navigation Performance operations on its 737-800 fleet in 2007 and is "typically saving" 960 kg. of CO2 on arrivals where it can employ RNP. Southwest Airlines is investing $175 million to equip its entire fleet for RNP and recently estimated the potential carbon reduction in one year of flying RNP procedures between Dallas and Houston at 8.42 million lb.

Fly Less, Emit Less

IATA forecasts that airline carbon emissions will decline nearly 7% this year compared to 2007. Around 2% will come from implementation of Performance Based Navigation and more fuel-efficient ATC routings, but the bulk will be from cutbacks in capacity owing to the global recession. From an airline perspective it appears that the downturn may have bottomed out. Freight and passenger traffic have not begun to recover, but they are not falling further, nor is revenue. Many economists expect an L-shaped recovery, meaning that traffic and revenue figures will remain depressed for some time.

Of particular concern is that the price of oil has risen more than 70% since the start of the year despite the fact that demand is down 3 million barrels/day compared to 2008 and inventories hold 60 days of reserves, noted Pearce. The only thing that has prevented further damage this year is cheaper fuel, a $59 billion savings compared to 2008 on an annualized basis. No airline can offset a 15%-20% revenue decline if oil climbs back into the $90-$100 range.

The risk also exists that it will not be business as usual when the recovery finally arrives. As noted above, US spending on air travel as a percentage of GDP never recovered to 2000 levels. That gap resulted in $22 billion in missing revenue in 2008, according to ATA, or around 12% of US industry revenues, while Gary Chase of Barclays Capital has estimated the cumulative total over the past seven years at $150 billion.

Constant-shock syndrome was a phrase coined by Centre for Asia Pacific Aviation founder and Executive Chairman Peter Harbison to describe the rapid-fire sequence of negative external events in the early part of the decade that turned the airline world upside down. It seems equally applicable today.

ATW's World Airline Report is a combined effort led by ATW Editorial Director Perry Flint and Managing Editor Kathryn Young. Contributing to the report were Sandra Arnoult, Cathy Buyck, Katie Cantle, Danna Henderson, Kurt Hofmann, Aaron Karp, Brian Straus and Geoffrey Thomas. Proofreading and copy editing support was provided by Christine Boynton.

Fleet data and the airline financial and traffic tables are from Ascend Online Fleets database, www.ascendworldwide.com; tel: +44 (0) 20 8564 6700; fleets@ascendworldwide.com

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