| Recession over? |
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The strong rebound in air passenger traffic, especially in the Asia-Pacific, is continuing, bringing high load factors, improved ticket prices and renewed profitability to airlines. But there is still a need to tread carefully. Recession over. Those were the words of Airbus chief operating officer, customers, John Leahy at July’s Farnborough Air Show. And if Europe’s big air shows are a bellweather for the prospects of global airlines then this year’s show at Farnborough brought a collective sigh of relief from the aviation industry. New aircraft orders worth nearly $30 billion were announced, a leap of $23 billion over the Paris air show one year earlier. It was a clear sign that carriers are, at last, putting the global financial crisis behind them. In addition, last month, Cathay Pacific Airways signed a deal for 30 A350s and six B777s worth $9.7 billion. And Boeing announced American Airlines had contracted for 35 NextGen B737-800s, worth around $2.6 billion. Airbus deals totalled $13.2 billion and Boeing $12.8 billion at Farnborough. “The recession is definitely over. Liquidity is back in the market, traffic is back in the market and GDP growth is back. That is why we are seeing strong growth,” said Leahy. In July, the International Air Transport Association (IATA) reported that compared to the same month a year ago international passenger demand was up 9.2%, with freight demand showing a 22.7% increase. IATA’s director general and chief executive, Giovanni Bisignani, said the recovery in demand had been faster than anticipated, but the pace would slow towards the end of the year. Asia-Pacific carriers outperformed the industry with 10.9% growth in July. A capacity increase of 5.1%, less than half the demand growth, pushed load factors higher, said IATA. The region’s airlines are expected to report a profit of 2.2 billion for the year. Aircraft manufacturers are raising their sales forecasts for the coming year. The European planemaker said it will now surpass its forecast of 300 aircraft orders this year, possibly hitting 400. Boeing too is confident. “We’ve raised our orders forecast twice,” said the U.S. manufacturer’s president and chief executive, Jim Albaugh. “We might do it a third time.” Albaugh said despite some continuing uncertainties, Boeing’s overall view of the market is becoming more positive as the world regains its economic footing. “The market is clearly coming back and I feel very confident about how we are positioned to regain - and retain - leadership in this business,” he said. “I’m encouraged by the fact that the economies around the world are moving in a positive direction now,” said Bombardier president, Gary Scott. “We all know Europe is struggling maybe a bit more than the U.S. and both are struggling relative to the rest of the world, but it’s all moving in the right direction.” The Farnborough sales binge didn’t come close to the record $88.7 billion worth of planes sold at the show in 2008, before the global financial meltdown took hold, but it has boosted industry confidence. With air traffic figures – both passenger and cargo – still recording big monthly increases there is no sign of any immediate slowdown in recovery. Yet the industry remains nervous. The Asia-Pacific may be powering ahead as the leader of the rebound, but last month there was growing concern the U.S. economic recovery may be stalling. And Europe’s fiscal position remains fragile. There were words of caution from analysts. “As we move into the second half of 2010, attention has become focused on 2011 and beyond. Whilst the raft of new order announcements at Farnborough are seen in some quarters as providing a positive boost to sentiment for the sector - despite the fact 160 of the aircraft represented existing orders or option conversions and others were new lessors acquiring stock - it is necessary to keep a sense of perspective,” warned Chris Tarry, of London-based Aviation Industry Research and Analysis (CTAIRA). He said despite the tendency of many observers to take the “glass half full” view of the world, there was no escape from the fact “that economic and related news remains mixed and there seems to be no consistent trend even over the relatively short term”. One of his concerns is while airlines have handled the reintroduction of capacity well, bad decisions that are putting more seats in the air could pose a danger. However, it is hardly surprising airlines across the Asia-Pacific have been systematically adding capacity in recent months. The Association of Asia Pacific Airlines (AAPA) director general, Andrew Herdman, said the region’s airlines have seen a solid recovery in leisure and business travel, as well as robust air cargo demand, with overall traffic back to pre-recession levels. AAPA airlines carried 89 million passengers in the first half of 2010, up 14.9% from the same period last year. “Yields have recovered as the cheaper fares and deals are being removed from the market place. The recovery of business traffic has improved the mix and as a result airlines are shifting back into profitability,” said Herdman. “Everything we are seeing, particularly in this part of the world, points to that continuing. Against that you’ve got concerns reflected in the volatility of stock markets, which have led to doubts in some quarters about the sustainability of the recovery so you have to weigh that up.” Herdman said airlines had assessed this fact and were going to add modest amounts of capacity. “My view is after two very difficult years of heavy losses, fleet utilization is recovering. That will add some capacity. New aircraft will probably add another 5%. “But at the moment we are seeing a volume recovery that is in excess of that figure. Load factors have risen to record levels around the world. We can reasonably expect to see capacity coming back and load factors stabilizing rather than continuing to rise.” Herdman said the International Monetary Fund was projecting a global economic growth rate of 4.6% for the year, led by 9.2% growth in Asia’s more dynamic economies. Both major legacy operators and low-cost airlines are all reporting increased traffic, revenue and profitability. Cathay Pacific Airways made a record first-half profit of US$881 million. Chief executive, Tony Tyler, said reservations were “looking very good” as the economic recovery revives travel demand. “We can look forward to the next six months with some confidence. Forward [passenger] bookings are looking very good for the rest of the summer. Cargo is looking good for the rest of the year,” he said. Singapore Airlines is another carrier back in the money. It posted a better-than-expected first quarter profit (April-June) of $184.7 million. That compared to a $227.2 million loss in the same period last year. “Advance bookings indicate the year-on-year recovery in passenger carriage and yields, evident in the quarter to June, will hold up for the rest of 2010. Similarly, leading indicators suggest the recent resurgence in air freight may be sustained in the near-term, although the rate of growth may abate,” said the carrier. And Qantas Airways, despite a full year profit (ended March 31) of $100.7 million – down 4.3% on the previous year – said it expected recovering demand for air travel to lift earnings growth this year. Chief executive, Alan Joyce, warned of “volatile trading conditions”, citing foreign exchange rates, fuel prices and general trading conditions making it difficult to accurately predict the year ahead. “International demand and yield across the business and leisure sectors continue to improve and domestic business demand is also strengthening,” he said. Figures for region-wide air traffic growth in July were not available at press time, but indicators are good. For example, Cathay Pacific and Dragonair’s combined traffic figures for the latest month available, showed another significant increase in the number of passengers and cargo. Passenger numbers for the two carriers in July were up 19.5% on the same month last year, with load factors at 87.5%, a rise of four percentage points on the same month in 2009. For the first seven months of 2010, the number of passengers carried was up by 10.1%. IATA’s July airline business confidence survey also painted an optimistic picture for coming months. “Almost 70% of respondents reported improved profitability during the second quarter of 2010 and a similar high proportion expect further improvement in the 12 months ahead,” said the survey. The International Civil Aviation Organization (ICAO) was also backing ongoing recovery. In a statement, it said passenger traffic should grow at 6.4% this year compared with a 2% decline in 2009. “Traffic for Asia-Pacific airlines should grow considerably faster than the global average, due to better economic prospects in states such as China and India, where aviation activity is expected to expand more rapidly,” it said. Official Chinese statistics show passenger volume up 17.6% over the first six months of this year (freight tonnage was up 31.7%). At the same time, Chinese airlines are forecasting dramatic profit increases for the coming six months. Peter von Moltke, chief executive of UBM Aviation, parent company of global aviation data firm OAG, said North America, the most mature aviation market and until recently the largest, trails all other regions in seat capacity growth. Worldwide, seat capacity and frequency were scheduled to grow by 7% and 6% respectively in August. Airports too are seeing an upswing. Airports Council International (ACI) reported last month that firm passenger demand brought strong 8% traffic growth in June 2010 compared to June 2009, maintaining the positive momentum established in the preceding months. International passenger growth contributed strongly with a rise of more than 10%. Domestic traffic grew 6%. In the first six months overall world passenger traffic increased by 6%, international by almost 7% and domestic traffic by 5%. Notable growth of more than 20% was reported by airports at Kuala Lumpur, Taipei, Jakarta, Shanghai Pudong, Sao Paulo in Brazil and Moscow Sheremetjevo. ACI director of economics, Andreas Schimm, said ACI had compared first half results in 2010 to first half results in 2008, a period of relative calm prior to the global economic downturn. “For passenger traffic, this comparison highlights significant shifts in world traffic shares. For the first six months of 2008, North America and Europe had larger total traffic volumes than the other regions, but both regions reported approximately 7.5% fewer passengers for the same period in 2010,” said Schimm. “Asia-Pacific airport traffic, by contrast, grew 11.5% in comparing total traffic in 2008 and 2010. Middle Eastern airports are a remarkable 19% above the 2008 level, with Africa and Latin America-Caribbean just slightly above 2008 first term results. “In short, North America and Europe remain well behind their respective 2008 pre-crisis levels whereas the other regions have emerged stronger.” Schimm said overall the global industry in the first half of 2010 was still almost one percent down compared to the pre-crisis period due to the significant declines in the major regions of Europe and North America. “The impact of the volcanic ash crisis on Europe’s declining 2010 results further exacerbated the slow return of European international traffic to pre-crisis levels, but it does not overshadow the structural change in the markets of the air traffic industry. It is the strong growth in the domestic markets in China and Brazil that have shifted the balance,” he said. Expressing some concerns for the market, IATA chief economist, Brian Pearce, reported that by late July jet fuel prices sat near the lower end of the $80-$100 range. “Even at this level, the average price for the year to date is 24% higher than for the full year 2009,” he said. Air fare levels may have improved, but they remain depressed compared to two years ago. Fares on international markets have risen on the back of returning demand and relatively tight supply conditions, but the growth rate stepped down in May. Premium fares rose 8.5% compared to year-earlier levels and economy fares were up 4.5%. So, while fares have risen from their recession trough, they still remain around 15% below their pre-recession peak of mid-2008. And capacity levels are creating concern. Pearce said the completion of the “restocking phase of the inventory cycle [reintroduction of capacity] and withdrawal of fiscal stimulus is likely to slow growth over the second half of the year, but this has not happened yet. “During 2010, passenger capacity has returned at a rate more or less matching the expansion in demand. In June, capacity increased slightly faster than demand – at an annualized rate of 10% versus the 6% demand increase. “It is too early to say whether this begins a phase of significant new capacity increases, but this risk remains. Careful decisions on further additions to capacity will need to be made, especially if demand growth slows over the second half of the year.” Source: Orient Aviation, September 03, 2010 |
