Optimistic noises from Geneva April 2010
Optimism is back in the air for the global aviation industry, according to the 24th annual Geneva conference on Aircraft Finance and Commercial and Business Aviation, which took place in March.
Although attendance at the conference was relatively low (as to be expected in this weak economic environment), the mood of the gathered luminaries was slightly more optimistic than last year (see Aviation Strategy, March 2009), when the industry was in the depths of the financial crisis. Although the continuing problems of debt funding and credit gap were at the top of many people’s minds, the manufacturers naturally retained their usual optimism, and — most interestingly — the now usual poll of audience views revealed some interesting results.
The poll came midway through the event, after the prime forecast presentations on the global economic outlook (from Douglas McWilliams of the Centre for Economics & Business Research) and the outlook for the airline industry (from Brian Pearce of IATA) but before Avitas’s Adam Pilarski’s habitually irreverent view from the other side of the pond.
Goodbye to the downturn
The main conclusions from McWilliams macro–economic presentation were that the world downturn is over. While the initial trampoline bounce–back had been quite rapid, this is coming to an end, but in the short–term the US economy is expected to be much stronger than Europe, with a much faster investment recovery — though this may slow after 2012. Overall Western world growth is likely to be modest for 3–5 years because of (continued on page 2)the need for fiscal retrenchment and bankers (and borrowers) caution (although McWilliams pointed out that the impact of the quantitative easing is unlikely to be inflationary).
The movement from West to East has also been accelerated the Eastern world is recovering at nearly the rate of growth pre-2009, and China is now expected to resume its historic position as the world’s largest economy by 2020. The message was to not just think of China and India the emerging markets include Latin America, the Middle East and Africa.
Within the Western economies McWilliams expects the Euro to fall against the Dollar towards parity (and doesn’t expect the Euro to survive in the long run), while assuming low inflation and low interest rates as the world savings glut (and low consumer spending) continues. IATA’s Brian Pearce also highlighted the effect of the two–speed recovery on the fortunes of the aviation industry, showing that industrial production in developing countries has almost returned to pre–crisis levels while that of the developed world was still some 15% below the peak.
This view drives the assumptions of IATA’s forecasts: traffic has rebounded (particularly freight as a coincident economic indicator) and with a significant cutback in airline capacity (mainly seen in lower aircraft utilisation), both passenger and freight load factors have rebounded.
However, revenues remain well down (having fallen by an estimated and unprecedented 15% in 2009), primarily as a result of a 35% slump in premium class revenues from the peak. Forecasting the industry’s global profitability is notoriously difficult; this time last year IATA had been estimating a US$1bn operating profit for 2008 and a $4bn profit for 2009. In the end 2008 produced an operating loss of $9bn, and at the turn of the year IATA was estimating a similar loss for 2009.
This estimate of global losses for last year has now been slashed to near break–even, and IATA has upped its forecast for industry operating profits in 2010 to $8bn (from $4bn), while still expecting a net loss. However, based on the two–speed recovery it expects both US and the European carriers to continue to generate significant net losses mitigated by reasonable levels of profitability in Asia and Latin America while pointing out that the significant number of new aircraft to be delivered over the next two years combined with the slack inherent in the lower utilisation of widebody aircraft in particular may make the forecast recovery precarious. Notably the IATA forecasts now show revenues rising this year by nearly 9% — which would be only 8% below the peak achieved in 2008.
In the tables below we show the 12 questions posed to the audience in the polling session along with their responses. The response rate was fairly good, with on average more than two–thirds of the audience pushing their voting buttons (better than many general elections!) — but as usual there appeared to be some inconsistencies. More than half of respondents believe that the shape of the recession will turn out to have been V–shaped, suggesting that the world will bounce back to the status quo ante and yet 40% believe that industry revenues will not return to pre–crisis levels until after 2012 (two years later than the responses last year on being asked the same question suggesting even greater pessimism). More than half stated they flew to Geneva in a premium class and 90% believed that intra–European business class would die out.
60% of the delegates thought that the likelihood of continuing high oil prices would accelerate industry consolidation (but a sizeable 40% later believed that industry consolidation is a zero–sum game), while the technological advances necessary to remove dependency on fossil fuels received support from less than a third but that was before an excellent presentation by pioneer Bertrand Picard on the sun–powered Solar Impulse project.
Despite the usual strong presentations by the main manufacturers it was apparent that a large majority believed that for them to increase production in the current environment was far from sensible although intriguingly a sizeable fifth of respondents believed that the next generation of industry workhorses would come from left field and be built in China (unfortunately the Canadian option had been left out of the question), perhaps signalling a desire to see the duopoly broken.
As for the shape of the airline profitability cycle, it was apparent that the assembly believed that the industry is in for a long hard trudge along the road to recovery, but that this cycle may be no different from past history with 60% expecting the next peak of profitability between 2016 and 2019; giving perhaps once again a 10 year cycle.
If there is any conclusion to be made from this year’s poll it may only be that the audience was made up equally of optimists and pessimists with a healthy dose of sceptics: but at least the fear and despondency apparent in last year’s forum during the depths of the recession may have given way a little to an anticipation of a return to good times.
GENEVA FORUM POLL
|How did you travel to Geneva this year (test question)|
|By legacy airline in first/business class||53%|
|Uncomfortably squashed in the back of the plane or on an LCC||35%|
|On a bus, by car or on foot||11%|
|What shape is this recovery really going to turn out as?|
|U or V||55%|
|Given recent cuts in thin long-haul routes and relative strength of the major hubs, who is winning the segmentation argument between the 787 and A380?|
|Neither — it is temporary||60%|
|Oil production in decline, pressures of the environment lobby, threats of emissions trading schemes and an era of permanently high oil prices mean:|
|Dramatic technological advances are an urgent necessity||28%|
|The airlines will have to raise fares to make air travel elitist again||11%|
|Industry consolidation will accelerate towards those who have and those who can afford new technology||61%|
|When the 747 was introduced in the 70s it was the largest passenger aircraft, had lots of space, was fitted with bars & lounges and carried 250 pax. There are now 747s flying with capacity of 580 seats. When will the A380 be operated at its single class design capacity of 853 seats?|
|I hate to think it will||31%|
|Is it sensible or desirable for the manufacturers to increase production when we have lost two years’ growth?|
|In which country will the next successful generation of 150-seat jets be produced?|
|Long-haul premium traffic has slumped dramatically in this recession and:|
|This is a temporary phenomenon and will recover to previous levels||38%|
|It will recover but to a lower level than previous peaks||58%|
|It is a permanent paradigm shift||4%|
|Short-haul premium traffic — particularly in Europe — had been in decline even before the recession hit. Is this permanent and will it disappear completely?|
|Yes, because there is no perceived product difference||41%|
|Yes, because the LCCs provide a good and much cheaper alternative on a short sector flight||25%|
|Yes, because I/my company will continue to cut back on travel budgets||25%|
|BA, Iberia and American seem likely at long last to get ATI and be able to operate a joint venture with immunity. All three alliances will then have a level playing field on the Atlantic.
Industry consolidation …
|Is good because it cuts out competition and will allow airlines to make profits||43%|
|Is good because it provides additional benefits to the travelling public||17%|
|Is a zero-sum game||41%|
|When will industry revenues recover to pre-crisis levels?|
|When will be the peak of the next airline profit cycle?|