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Home | Update | LATEST ISSUE | Gallery | FR Profile | Datafiles | FR 1/98 AIRLINE GROWTH FACES NEW RISKS by Heiko Reuter Once a year, when the airline organization IATA calls their members for the annual conference, they all meet: the world's airline heads and their staff. The better the financial situation, the better the mood. At the 1997 meeting in the Jordanian capital Amman, the temper was not too bad. However, there were some airline bosses who looked worried. At the bottom line, the airline industry is feeling a vivid upwind. This was not always the case. At the beginning of the nineties, the entire branch was fighting for survival. From 1990 to 1993, the airlines generated losses in the amount of $15,6 billion worldwide. Four years later, the branch has successfully overcome its stigma of being a loss-making business - at least, that's what it looks like. In 1997, the 259 airlines that are organized in IATA generated profits of $4,5 billion. "The fourth year in the profit zone", IATA general director Pierre Jeanniot is pleased to say. While the carriers did not surpass the record year 1995 (5,2 billion dollars), the profits increased by 50 percent as compared to 1996. For 1998, Jeanniot foresees another economical climb for the carriers, reaching again the plus of 1997. Still, suddenly there are some doubts arising. Many signals are on green for the world's air traffic - but not all. Practically each traffic expert forecasts growth for the branch. The IATA airlines counted more than 1,4 billion passengers traveling on their network in 1996. Depending on the prognosis, this number will increase by five to eight percent per year. Boeing, in its "Current Market Outlook" is estimating that the air traffic volume, measured in revenue passenger miles (RVM), will increase by the factor 2,6 over the next two decades. The growth will go through all continents, the biggest boom being forecasted for the Asian region. From the airlines' point of view, this region has a significant development potential. Airbus Industrie has calculated that currently 22 percent of all passengers are generated in the Asian-Pacific region. The proportional largest number of passengers are in North America. However, these proportions will have changed in only a few years from now. Then, every second passenger will be a traveler from the Far East. China is the fastest growing market in this booming region. According to the Boeing specialists, China's air traffic is showing two-digit annual growth rates. It looks like the market set-up for the airlines is ideal. Also, most of the carriers have learned from the past. Today, alliances decide about success or failure, something that was unthinkable some years ago. Tomorrow's global airline landscape will show only four or five major airline concerns. Whoever misses out on this long-term trend will have left only niches to serve. Only few of the leading companies have missed to adapt to the serious change towards competitiveness. However, in spite of all the positive signals, some new clouds are moving in on the horizon. Although the passenger-load factors are developing well, passing the 68 percent mark in 1996 for the first time, the average yields are decreasing faster than the airlines are able to reduce the costs. That's why profitability must be secured through a growth in quantity. Economics specialists confirm that an increase in profits will be impossible without a simultaneous increase in traffic. But what will happen if the expected growth in passenger numbers doesn't come because the economic trend goes in a different direction? Just how shaky the forecasts are is shown by what was going on in the prospected boom region in the Far East in the past few months. Not only that large-scale fires in Indonesia partially paralyzed the air traffic in Southeast Asia. In September and October, the financial markets in Asia looked like a thriller, making the world's economy hold its breath. Some of the most important Asian currencies lost as much as 30 percent to the US dollar. The result was that the stock prices at the stock markets in Singapore, Malaysia, Thailand, and Taiwan fell incredibly. The financial market places are globally tied together: The stock markets in Europe and in the USA also started a downhill ride. The downfall of the stock prices has fatal consequences. The trust in the Asian potential has diminished. So far, Asia had been a driving force in trade and industry, having the highest growth rates worldwide. The Time Magazine has already identified an entirely new trend: "In the view of many investors, Asia has become a region that will be facing many problems" - the economical engine is stuttering. Only very few other businesses depend so much on economical growth as the airline industry. Once the economic trend is down, there are less passengers. A rule of thumb says that the growth rate in air traffic equals twice the gross national product. However, this principle also works the other way round. IATA general director Jeanniot: "When the world economy is coughing, we are getting a lung infection." Many charter carriers can already feel the consequences of the big economical hit. Following the crash route, the stock prices of the airlines, which are noted at the Far East's stock markets, dropped also. At the end of September, Singapore Airlines had lost 7,9 percent, All Nippon Airways 8,8 percent, and Japan Airlines 15,3 percent of their stock value in a three-months comparison. The Cathay Pacific stocks even dropped by 22,8 percent. The boards of the Asian carriers are seriously worried, not only because of the dramatic stock losses. Singapore Airlines, which has been one of the world's financially most successful carriers for years, sees a potential for declining passenger numbers and decreasing load factors. According to SIA head Cheong Choong Kong, the region is in an economical drama. An airline analyst says: "We don't look too optimistic into the next two or three years." It looks like Cathay Pacific has been hit hardest. This is partially due to the decreasing tourist business with Hong Kong, since the former British territory was given back to China. In September of 1997, Cathay counted 9,8 percent less passengers on board their aircraft than in September of 1996. In July, it was even 13 percent. Cathay reacted by halting employments and offering low-cost tickets to fill the empty seats. The orders of new aircraft are being delayed also. The crash of the Far East shows: The airline industry is skating on thin ice. From the global point of view, the branch is doing well - still. However, if the downhill trend in Asia continues, it is possible that the non-Asian airlines will be pulled down also. The next air traffic crisis would be at hand. Another deep economical slump is something that the branch would not be able to handle easily now. The cost problems are way too dominant. "We must decrease our costs even more", says IATA head Jeanniot. Boeing's airline analysts hit at the same spot: "In the long term, the profitability of the airlines will depend on the development of successful strategies to reduce the costs." According to airline experts, two new approaches are vital for this market strategy: first, a broad introduction of new satellite-based navigation system FANS, in combination with creating innovative financing tools for "mobile investments" (aircraft and engines). Once this miniature quantum leap is accomplished, the airline industry could save up to seven billion per year additionally, says the IATA. The next IATA conference will be in July in Montreal. Possibly, the mood of the airline heads will be much more tense than at the recent one in Amman. The number one priority must be to prepare for the worst. Is the current situation the prelude for another crisis or just a flash in the pan? Maybe the recent stock market inferno in Asia was only a faint that will pass. But, then again, maybe not. From page 28 of FLUG REVUE 1/98 Home | Update | LATEST ISSUE | Gallery | FR Profile | Datafiles | FR 1/98 Copyright 1997/98 by Motor-Presse Stuttgart. All rights reserved. Last updated December 5, 1997 FLUG REVUE, Ubierstr. 83, 53173 Bonn, Germany