Long-awaited upturn? Jul/Aug 2003

Stockmarkets are certainly looking more optimistically or maybe just more speculatively at airline shares. For example, over the past three months (to the end of June) the prices of some of the US network carriers have skyrocketed — American’s share price has quintupled, Continental’s tripled. European carriers like BA and KLM has posted more modest but still sizeable gains — around 35%.

It might have been thought that the successful LCCs were fully valued yet JetBlue (see pages 16–19) has experienced a 50% rise in its stock–market valuation.

Back in the real world, there is some tentative evidence of an upturn. The most recent data on transatlantic traffic for the last two weeks of June shows a 9–10% rise compared to last year. Asian traffic was still very depressed but, as suggested in the previous issue of Aviation Strategy, schedules have been restored and traffic has come back much more quickly after the end of the SARS outbreak than had been widely expected. In early July, Amadeus Asia reported that daily bookings had reached levels of the same time last year.

One of the features of the post–September 11 aviation markets has been how rapidly airlines responded to collapsing demand by cutting capacity. As a consequence, load factors have remained strong — this summer, transatlantic passenger load factors look to be 2–3 points higher than in 2001, while traffic is 10–15% lower.

Translating these load factors into higher yields is the huge problem. Bubble era yields will never come back, but at present there would seem to some opportunity to push up back–end yields, if only because planes are being filled by full–fare Economy passengers being upgraded to Business and full–fare Business being elevated to First if available. Then the airlines will have to restore capacity to make long–haul flying a less painful experience, and hopefully create a virtuous demand circle.