The global credit crisis could have profound and lasting implications for the world’s aviation industry, including in the Asia-Pacific region.
The financial sector turmoil is already playing out in aviation markets, progressively affecting demand and yields. Latest data from the Association of Asia-Pacific Airlines (AAPA) for August shows a flag carrier sector (which primarily focuses on premium demand) that is in sharp decline.
Passenger numbers fell 3.7 per cent in August year-on-year; revenue passenger kilometres dipped 1.2 per cent, although airlines still grew their capacity (available seat kilometres increased 2.4 per cent); leading to a sharp drop-off in load factor (down 2.8 points year-on-year to 76.7 per cent).
But the region’s economies and airlines are still performing much better than their American and European counterparts.
Airlines are at the pointed end of this delicate consumer and business equation and strong balance sheets will determine who rides the storm best in coming days.
The following is a round-up of the various aviation stakeholders and how the credit crisis could affect them.
* Governments: Some governments, particularly those with struggling or failing flag carriers, may become more protectionist in this environment. Momentum for liberalisation of aviation access and reform of ownership rules could slow over the next two years, particularly where the perception of sector job losses is concentrated.
Other governments, however, will remain receptive to policies that encourage economic development and trade in a period of global economic slowdown.
Overall momentum for change could slow and government investment programs in critical aviation infrastructure, including new airports and ATM reform, could be threatened by competing economic policies.
* Airports: The world’s airports can expect a downturn in traffic for the next 18-24 months. Airports Council International is expecting a pick-up in demand in 2010 and has called for airports tobe”resolute” in the coming uncertainty.
Stressed airlines will be seeking better deals on charges and airport-airline conflict could rise in the period ahead.
Airline failures will cause significant disruptions for some airports and a short-term loss of routes, though established city-pair markets will continue to attract airline capacity.
Airports will need to increase their lobbying for aviation liberalisation, to offset possible backsliding by governments.
* Airport retailers: Anecdotal evidence in some established markets, such as Japan, point to a downturn in the sales of high-value and luxury items as the credit crunch intensifies.
Airports may need to adjust their commercial offer to reflect changing buying habits, with a potential increased focus on lower-value items, such as food and beverage sales.
* Network airlines: The world’s large network airlines are bracing for a further downturn in premium travel demand, as corporate travel budgets are tightened and financial services sector jobs, in particular, are slashed.
Airlines with an exposure to these segments will need to carefully monitor their capacity levels. A shift to premium economy products is expected.
* Low-cost carriers: Slowing economies and falling oil prices create ideal conditions for LCCs to expand and grow their market shares as consumers and businesses become more price sensitive.
Access to funding remains critical, as many LCCs have large aircraft order books to fund.
Those with truly low costs (not just low fares) will rise to the top in this environment, while several unfocused budget carriers could exit in these conditions.
For airlines of all types and sizes, a solid balance sheet will be vital in a time of prolonged downturn.
* Manufacturers: Aircraft manufacturers have so far reported low rates of cancellations of orders.
Cancellation penalties can be punitive and airlines will aim to re-schedule, rather than cancel orders.
Boeing, for example, expects cancellation rates could be in the order of 5-10 per cent in the current crisis.
Order deferments are on the increase, which, given the manufacturers’ large production backlogs and new model production difficulties, simply extends that backlog well into next decade.
The collapse of increasing numbers of airlines is, however, releasing significant numbers of short-haul aircraft into the market.
This will drive down prices (and values, for airlines holding aircraft orders).
However, widebody aircraft availability remains tighter, which is keeping prices reasonably strong.
A major concern for the manufacturers remains exchange rate volatility and just how this will affect pricing and competitiveness.
* Lessors: Significant ownership changes in the leasing industry are imminent.
ILFC, the world’s second-largest lessor, is already working on a new ownership structure as distressed parent American International Group looks to quickly dispose of assets.
The fundamentals of the leasing business remain the same — there is still steady demand for their services and leasing rates remain strong, particularly for newer widebody aircraft — for now.
Placing older, less fuel-efficient narrowbody aircraft will, however, be an increasing challenge as airlines park these aircraft in large numbers.
And until AIG has sold off ILFC — probably not in a fire sale — uncertainty prevails.
* Business jets: This booming segment is expected to be nearing its peak, with annual business jet production tipped to rise from 1400 units worldwide this year to 1600 next year, according to Forecast International, before starting a three-year decline, dropping to a level of 1515 units by 2012.
Growth is expected to resume in 2013.
The very light jet market is expected to be a dynamic portion of the business jet market and new companies entering this market, particularly in Europe, are confident of success. Much will depend on the extent and nature of the global economic downturn.
Overall, Asian aviation will not escape unscathed from the credit crisis. Anecdotal evidence suggests freight yields for some Asian carriers have stabilised in recent months as airlines have reduced capacity levels in line with market demand.
The same action might need to be taken on the passenger side too, but this is less likely as new deliveries arrive.
AAPA director general Andrew Herdman this week added his voice to the chorus of commentators predicting that more airlines would not survive the current combination of high oil prices, the credit crunch and a slowing global economy.
The gloom is expected to continue into next year, with Herdman saying the AAPA “remains cautious about industry prospects for the rest of this year and 2009”.
But he added Asian airlines were “better placed than many others to cope with current difficulties, and are still investing to take advantage of future growth opportunities”.