Post September 11 - Tragic times
October 2001
Coming to terms with the terrorism of September 11 is possible, but it’s terribly difficult. To the families and friends of all those innocent victims of this unspeakable cruelty, we can only offer our deepest sympathy and condolences.
In writing about the post–September 11 aviation market publications like Aviation Strategy find themselves in a peculiar situation. Suddenly the global media, even the tabloids, are trying to analyse the aviation industry — some of it very good and some banal.
For our part, we have tried to put some numbers of the extent of the traffic downturn and the effect on the global supply/demand balance — see pages 2–7. Inevitably, this is tentative at present and we would welcome feedback from our subscribers. We can create alternative scenarios using different assumptions.
There are also many issues which we have not had a chance to address properly yet. In particular, the whole financial basis of the industry seems to be wobbly.
As a consequence of the Swissair/Crossair rescue plan (see pages 8–9), the cost of capital for the whole industry will have been substantially increased. Creditors of what used to be a premier European flag–carrier will probably never get their money back or at least will have to go through protracted litigation. And what possible incentive will trade investors have for buying into flag–carriers if they can simply be re–nationalised? This has happened to Air New Zealand, which was only peripherally affected by September 11.
At the same time as the industry’s cost of capital goes through the ceiling, the US dollar prime rate has been cut to zero in real terms. Zero interest rates, as the Japanese experience shows, means asset deflation.
So how do the lessors react? This may mean that the lessors are not be facing just a dramatic cyclical adjustment but a long term depression in values. They are also going to have to absorb somehow a large volume of distressed jets. Even being owned by an insurance giant like AIG no longer looks like such a rock–solid idea.
As for the manufacturers, our only suggestion is that they rent plenty of desert space to park their output for the next 12–18 months. But if they help the airlines deal with this crisis, as they must, there will be a rebound, maybe a strong rebound in new aircraft demand in, we guess, 2003.
