2008 - Another year of flying dangerously

[Naim 6]

Another year of flying dangerously

 

SINGAPORE, Dec 29 — For most of the 500-odd airlines around the world, 2008 started badly — only to turn worse and then downright ugly. It was commercial aviation's annus horribilis.

 

Entering 2008 from a US$65 per barrel oil price environment, the industry was pushing the panic button by June as oil crossed the US$130 per barrel level (pbl).

 

Fuel accounts for 40 per cent of the total cost of operations for many airlines, and even higher for low-cost carriers.

 

By June, the International Air Transport Association or Iata, whose member airlines account for over 90 per cent of global scheduled traffic, announced that the aviation industry was staring at a potential collective loss of between US$2.3 billion (RM8.3 billion) and US$6.1 billion, based on a US$107-113 pbl average price range for fuel.

 

This was a massive US$10 billion reversal from its April forecast of profit of some US$4.5 billion for 2008.

 

Many carriers started slashing capacity, intensifying cost-saving measures and raising fuel surcharges.

 

By July, fuel was hovering at the US$185 pbl.

 

Then came the financial meltdown and the problem shifted from fuel price to traffic demand. International air traffic fell 2.3 per cent in September, then 1.3 per cent in October as travellers cut budgets.

 

Asia-Pacific carriers saw passenger traffic decline 6.8 per cent in September, then 6.1 per cent in October. Also worrisome for carriers such as Singapore Airlines was a slide in premium passenger traffic. October's 6.9 per cent slide, coming on the heels of an 8 per cent fall in September, was the fifth consecutive monthly fall.

 

But the biggest worry for many Asian carriers is cargo.

 

International air freight traffic contracted by 7.9 per cent in October for a fifth consecutive month of increasingly severe drops. Total cargo traffic is expected to decline by 1.5 per cent this year, and another 5 per cent next year.

 

Said Giovanni Bisignani, Iata's director-general: “The slight slowing in the decline of passenger traffic is likely only temporary. The deepening slump in cargo markets is a clear indication that the worst is yet to come.”

 

Asian carriers rely more on cargo revenues than their US and European counterparts.

 

Many are cutting capacity.

 

Cathay Pacific is grounding two B747 freighters next year, while SIA — which has about 300 pilots flying a fleet of 13 B747-400 freighters — lost S$67 million (RM160 million) in the six months to Sept 30, a reversal of a S$17 million profit a year earlier.

 

“2008 was a year of ups and downs for the airline sector, going from good to bad very quickly,” noted Nick Ionides, managing editor of Flight.

 

Though fuel is now back to the US$80 pbl, demand is at its softest since 2001.

 

The “perfect storm” has already resulted in over 30 airline failures worldwide.

 

Asia has had its fair share: Oasis in Hong Kong, Adam Air in Indonesia, a small cargo airline in Japan, and smallish passenger carriers in Taiwan and South Korea.

 

With capital drying up, more failures are expected over the next six months.

 

Going into next year, most airlines will have to carefully plan capacity expansion. It may be just as well that Boeing and Airbus are facing delivery delays on their B787 and A380 lines respectively.

 

But it has not all been negative this year.

 

The opening of Changi's Terminal 3 further entrenched Singapore's position as one of the world's premier hubs. Tiger Airways reported its first set of profits, proving that the low-cost carrier model can work if done right. Singapore and Malaysia decided to take an enlightened path towards air liberalisation, allowing low-cost competitors into the long-monopolised Singapore-Kuala Lumpur route.

 

And Changi Airport's corporatisation was finally announced, paving the way for the world's most profitable airport to fly even higher.

 

China and Taiwan finally opened up to allow regular non-stop scheduled flights to each other. It has been a long 60 years late, but better late than never.

 

Looking ahead, recession is now the official forecast for North America, Europe and Japan through the next 6 to 12 months.

 

Iata expects global passenger traffic to fall by 3 per cent in 2009. The airline body also forecasts industry total loss to be in the region of US$5 billion this year, and US$2.5 billion next year.

 

“Weakness in travel markets has lasted three years in previous recessions,” Iata noted in a recent economics report. “We do not expect a return to traffic growth above 4 per cent until 2011. Economic forecasts imply that airline traffic will remain below the previous trend over the medium-term, with passenger travel forecast to be 9 per cent lower by 2016 than pre-crisis industry forecasts.”

 

But one enduring industry “fact” is that air traffic grows twice as fast as GDP. On average, throughout the cycles of the past 35 years, global revenue passenger kilometres have risen by 1.6 times GDP.

 

The reverse also often holds true, and could be the case through 2009.

 

On the cargo front, expect shrinkages through 2009. However, a healthy recovery should kick in by 2010.

 

Looking ahead, the issue for airlines will be yields. Yields have typically fallen during recessions. This is because, although costs are down, competition also pulls down fares/rates.

 

It will be a tough year ahead. But when the dust settles, airlines with the strongest balance sheets and brands will still be standing, and probably go on to take the “spoils” of war. — Business Times Singapore

 

http://www.themalaysianinsider.com/index.p...ing-dangerously