Look on the bright side December 2008

Everyone knows that 2009 is going to be difficult, challenging, dire, and catastrophic for some … but grizzled veterans of aviation and economic cycles always manage to look on the bright side, seeking out the opportunities that arise from recession. For example, the emergence of the successful European LCCs in the early/mid 90s, the result of a combination of deregulation and the availability of aircraft, crews, airport facilities etc. And post September 11 those airlines courageous and solid enough to negotiate massive unit discounts on mega–orders were able to lock in an unassailable cost advantage.

As always, the significant changes that will hit the aviation industry as a result of this recession are impossible to predict. Still, here are some random thoughts.

With the three European majors consolidating around five or six global hubs, and eliminating the peripheral competition from carriers like Brussels Airlines and Austrian, opportunities for longhaul, low–cost might be reconsidered for point–to–point between secondary airports, especially if fuel prices remain low. The first wave of long–haul all–business carriers failed comprehensively, but then so did the first wave of European LCCs (Air Europe, etc).

2009 might be the year when financial fortunes are reversed between the US industry and the rest of the world. Influential analysts are postulating that the combination of real capacity cutbacks plus lower fuel prices could result in a rebound in the US Legacies' financial results — a detailed review has been posted on our website.

US airports are an interesting prospect. Following the sale of Chicago Midway to a consortium led by YVR Vancouver Airport Services, and the boost to the City of Chicago’s bank balance of a billion dollars, other US cities are starting to look at the privatisation process, which is well established in the UK and some other European countries.

While 2009 is going to be very painful for most of the smaller European and Asian LCC new entrants — and many are going to go out of business — the whole concept should not be thrown away. There are niche markets that can be profitably exploited by specialist carriers using the latest LCC–type techniques. One of the problems with the business models of the last wave of new entrants was that they tended to assume exponential growth — that they could somehow emulate the scale and profitability of a Ryanair or an easyJet — and investors were drawn to such stories. More modest growth plans linked to regional expertise rather than expectation of early IPO or trade sale exits might well have been achievable — but then many airline start–ups reflected the financial zeitgeist of recent years.

Investors in leasing companies can’t be feeling too comfortable at the moment, and a shake–out looks imminent, through perhaps not quite as dramatic as in the early 90s when mega–lessor GPA went out of business. Still, those securitised products based on theoretical aircraft values and creative mixes of airline credits are coming under increased scrutiny. Industry churn could shift the geographical base of the industry to zero as opposed to 10% corporate tax zones, i.e. from Ireland to the UAE (and it looks as if there will be plenty of cheap office space in Dubai).