The new paradigm? June 2003

There is a very worrying view that that the fundamentals of the global aviation industry have been changed so radically that no overall traffic growth can be guaranteed in the medium term.

The new paradigm is based on the likelihood that we are facing a protracted period of regular but unpredictable shocks, some deliberately directed at the airline business, some random. So the series of catastrophes — September 11, Iraq War 2, SARS -will continue.

At the same time the confidence of the travelling pubic has become so fragile that any incident, or even suspicion of an upcoming incident, will cause traffic volumes to plummet.

This is a possibility but there is countervailing evidence: for instance, the incipient signs of a long–haul traffic recovery at the turn of the year and the continuing dynamism of the LCC sector.

Traffic and revenues may not have been lost forever, and a rebound is still on the cards for next year (that at least is our contention — see Aviation Strategy, April 2003, for example).

It is very difficult to get a clear perspective in response to a catastrophic event; usually observers over–estimate the impact over time. The chart below shows Deutsche Bank’s prediction of Cathay Pacific’s and Singapore Airlines' traffic recovery from the depths of the SARS impact (with the number of new hospitalisations now dropping rapidly in Asia, the turning point was probably reached in May). The bank sees at present only a slow recovery with traffic probably still below 2000 levels by the end of the year.

Yet the comment attached is "immediately post 9–11, the analyst community cut forecasts dramatically, but spent the next 15 months revising them up as traffic improved". We suspect the same again.

What is exasperating about the traditional scheduled airline industry has been the totally inadequate efforts made to restore faith in flying and reverse the negative psychology. And, the clumsy approach the airport security in the US has undoubtedly helped to deter travel. A proactive strategy on the part of the major airlines seems well overdue.