The latest FAA Aerospace Forecast proves once again how quickly fortunes can change in the U.S. airline industry. A year ago, the FAA’s prognosticators foresaw healthy growth in airline demand in Fiscal 2008. Now they believe domestic traffic growth will sputter almost to a standstill as weakening market conditions hit home.
“We’re seeing a definite pause in growth,” FAA Acting Administrator Robert Sturgell says. “We didn’t see [the pause] in last year’s forecast, . . . but this year it’s pretty clear – we’re talking flat growth in operations and slow growth in passengers.” Sturgell does stress, however, that while the near term looks bleaker, the longer-term outlook remains “vibrant.”
The headline numbers from the FAA’s annual forecast – which extends to 2025 – support Sturgell’s comments. Overall traffic on U.S. carriers is expected to rise by 2.9% in Fiscal 2008, down markedly from earlier projections of a 4.2% increase. Domestic traffic will be hurt particularly badly: Last year’s forecast predicted growth of 3.4% for 2008, but the new forecast sees growth slowing to just 0.6%.
Sturgell points to a “series of cascading events” as the cause of the forecast downgrade. Chief among these are oil prices continuing their climb past $100 a barrel, coupled with the U.S. economy’s apparent slide into recession.
The FAA is hardly alone in revising its projections. The International Air Transport Assn. in December slashed its global airline profit forecast due to the expected economic slowdown, and another downward revision is anticipated in the next few months. U.S. airlines – even traditional growth engines like Southwest Airlines – have also begun scaling back their capacity plans for this year.
There is hope on the horizon, however. The FAA believes a strong rebound will occur in Fiscal 2009, with overall traffic growing 4.7% and domestic traffic climbing 3.4%.
Some doubt this level of optimism. In light of rising fuel prices and signs of a recession, the FAA’s traffic expectations for 2009 “may be a bit aggressive,” the U.S. Air Transport Assn. believes. “While some of the actions by government may soften the Fiscal 2008 impact, it could push the influence of a slowing economy into 2009,” says ATA Chief Economist John Heimlich.
Interestingly, the FAA’s forecast does not assume any near-term airline industry consolidation. Talk of major airline mergers has circulated for years, but it appears that “institutional barriers” may be insurmountable except in the case of a “distressed carrier,” says FAA Policy and Plans Director Nan Shellabarger.
While domestic demand growth appears stagnant this year, the reverse is true in international markets. U.S. airlines’ international traffic is forecast to rise 8.9% in Fiscal 2008, due in large part to the new U.S.-European Union Open Skies agreement which enters force this month. U.S. airlines have added several new flights into London Heathrow Airport to take advantage of Open Skies, and transatlantic traffic is expected to increase as much as 15.5% this year.
The FAA believes the effect of Open Skies will be most noticeable over the next four years, when transatlantic passenger numbers on U.S. and foreign airlines combined will rise about 7% a year. Thereafter, transatlantic increases will settle down to an average of 3.9% a year. Flights between the U.S. and the U.K. and Ireland will see a larger climb in demand than other European routes.
The longer-term outlook for U.S. airline demand growth is essentially unchanged, despite the short-term challenges, the FAA says. Traffic is expected to rise by an average of 4.2% a year systemwide through 2025, and 3.7% for domestic flights. This meshes with Boeing’s market outlook for 2006-26, which sees system traffic for North American airlines rising 4% a year, and domestic traffic within the region increasing 3.4%.
Capacity growth closely follows traffic, with the average annual capacity increase 0.1 points lower than the traffic increase, the FAA believes. This will result in a slow but steady rise in load factors. Fiscal 2008 should see the domestic load factor remain unchanged at 79.8%, and system loads will climb slightly to 80.1%. Thereafter, the systemwide load factor will creep up to 81.7% by 2025.
The FAA’s prediction of when the milestone of 1 billion passengers a year will be reached has slipped from 2015 to 2016, due to the near-term slowdown. By 2025, U.S. airlines will carry more than 1.3 billion passengers a year.
One piece of bad news for airlines is the outlook for yields, which are a good indication of pricing power. While domestic yields are expected to rise by an average of 1.6% a year through 2025, in real terms they will decline by 0.7% a year. Existing and new low-cost carriers will continue to pressure mainline carriers in the U.S., the FAA says. Some industry experts believe the long-term yield outlook is even worse than the FAA projects.
Traffic growth is good for the airlines, but it presents a challenge for the FAA. There were 61.1 million operations handled by control towers at U.S. airports in 2007, and while there will be little increase this year, the total is expected to climb 1.8-1.9% a year until 2025. Meanwhile, en-route control centers will see faster growth in operations, because much of the new activity will be from airlines and “high-end” general aviation operators rather than in “local” GA flights.
According to the forecast, the number of commercial aircraft in the U.S. fleet will rise to 12,202 by 2025, at an average growth rate of 2.5% from the 2007 level of 7,816. The U.S. fleet will grow by 92 aircraft this year and 80 in 2009, with almost all of this expansion by low-cost carriers. The FAA’s estimate appears slightly more optimistic than Boeing’s. In its Current Market Outlook, Boeing sees the North American fleet increasing to 11,950 by 2026.