January Sales

Traffic Keeps On Plunging

Yield Erosion To Decimate Bottom Line On Big Airlines

System Capacity Cuts May Not Be Enough To Stem Losses Despite Lower Fuel Cost

Deferrals & Cancellations High On 2009’s “Hit List”

After arguably one of the most turbulent years in aviation, the hope that 2009 will somehow bring either respite or miracle cures to both aerospace and airline sectors is probably submerged in nothing more than a pipe-dream.

IATA’s bleak end of year assessment sums up how this year will equally be arduous if not worse than the one before it.

“The industry is now shrinking by all measures. The 1.0% capacity cut in international passenger markets in November could not keep pace with the 4.6% fall in passenger demand. We can expect deep losses in the fourth quarter,” said IATA’s Director General Giovanni Bisignani.

With October traffic falling 1.3%, Novembers plunge of nearly 5% points to many, if not all major blue-chip carriers wondering how long their sales campaigns can continue while watching yields of premium traffic fall off a cliff month after month like lemmings.

Image courtesy of Emirates

A quick browse of a half dozen websites shows the industry-wide carnage that has resulted in probably the best time to travel if you’ve still got a job and a regular income.

American Airlines, Air China, British Airways, Cathay Pacific, Qantas, Singapore Airlines and GOL are just a few whose sites are happily bandying about as many offers as they can to lure more non premuim passengers in a desperate short term clamour for traffic - even more so given that revenue from freight haulage is pretty much in freefall too.

“The 13.5% drop in international cargo is shocking. As air cargo handles 35% of the value of goods traded internationally, it clearly shows the rapid fall in global trade and the broadening impact of the economic slowdown. By comparison, this is largest drop since 2001, in the aftermath of September 11,” Bisignani went on to say.

Critically, for jet makers Airbus and Boeing, both of whom will be releasing final 2008 year end order figures, the nightmare prospect of deferrals and cancellations is all too real.

In hindsight, the recent delays to the 777F and the 747-8F may have been a blessing in disguise, but the reality is that for the US planemaker, all eyes will be on the 787 and how quickly it takes to the skies.

For Airbus, having already ended last year with triple-digit cancellations across its portfolio, it faces another year of progress and new challenges as it firms up the A350XWB family, still crippled with a weight problem not publicly acknowledged.

“Airbus won’t freeze the A350 before about February now, I expect. And even then it will only be partial,” says Arran Aerospace MD, Doug McVitie.

Backstop financing will probably feature for orders secured in the latter part of last year, as well as those won this year, particularly as the squeeze on credit makes purchases more difficult.

“Even allowing for Airbus’ recent disposal of widebody aircraft at up to 55% discounts (A340-600s, for example), there is every likelihood that the European manufacturer will have to resort to even more creative-financing deals to ensure continuous production across all models through the next 18 months,” McVitie adds.

Both Airbus and Boeing will have credit facilities on hand but neither will relish the prospect of a bank role to airlines, particularly when both are still spending vast sums of money on airplane developments that may not see returns for many years.

And finally there’s OPEC - holding everyone hostage with black gold everyone needs. With the global economy on the wane and recessionary pressures hammering down pretty much everywhere, OPEC’s cuts are far from over.

With 25 weeks to the Paris Air Show, the “splash-the-cash” syndrome will surely be a thing of the past.

Image courtesy of Airbus

Even the traditional melee of the big spending culture at this Novembers Dubai Air Show at the new Al Maktoum International Airport will likely not make a big noise as it did in 2007.

In a sign of the times, not even a mighty fire sale will be the knight in shining armour to rescue the wider industry.

Critically, how everyone emerges from it will dictate whether a full blown recovery is around the corner or whether we’ll see more bloodshed…

6 comments January 5th, 2009