Air Transport World

Recovery 2004: gaining strength: improving economies signal the start of an industry recovery, but the legacy carriers of Europe and North America must fight to enjoy its fruits.(Forecast)(Cover Story)

A subdued optimism flowed through the airline industry as the closing months of 2003 began to show positive signs--combined with rising economies and the absence of disease scares, major terror attacks and wars--that give credence to the belief that 2004 finally will start the recovery process the industry so desperately needs.

Clouding a clear vision of what is going on is the statistical distortion created by the Iraq war and SARS that will make a half-decent spring and early summer look like a runaway success. But absent extraordinary events, it is clear that 2004 will be an improvement for everybody. The big swing elements are the price of oil, which likely will go down but could go up, and any change on the conflict and health fronts around the world, which have much larger negative potentials. Nonetheless, the recovery is being greeted with delight, although the amount of joy varies greatly with the type and location of each airline.

The Asia/Pacific region, for example, is poised to reclaim the vigorous growth that was interrupted so rudely by last spring's SARS outbreak, with strong economic growth pushing traffic levels back up to pre-SARS levels for most before year end 2003 but yields still climbing toward parity with pre-SARS levels.

Improvements will be noted across the board this year in the other major airline markets of North America and Europe, but with caveats in both. In Europe, the legacy network carriers have yet to suffer the full low-cost-carrier onslaught of North America, but some LCC-related yield erosion, a slow economic rebound and continued heavy competition and overcapacity on long-haul international routes are depressing expectations for a rapid return to profitability for most European network airlines. In North America the economy's current strong bounce in past times would have had Majors lining up for new equipment, but not now. While the rising tide certainly will lift all boats, the boats weighted with the artifacts associated with their "legacy" label will not float as readily as the LCCs.

Nonetheless, all signs point to 2004 as a turnaround year that will end an unprecedented period of loss for the airline industry around the world. ATW forecasts a net profit of $3.2 billion for the world's airlines, led by Asia/Pacific carriers, with traffic rising 6% in RPK terms (See tables). Freight will maintain its growth pattern both around the world and in the US, as the rising US economy will drive Asian export traffic. The recovery in North America and Europe will not be nearly as robust, with near-breakeven financial results elevated by the strongly profitable low-cost carrier segment. ATW is forecasting a $400 million net profit for US carriers, excluding extraordinary items, which may be substantial considering the likelihood that United's fresh start accounting gain when it comes out of Chapter 11 this year will put the total deeply into the loss column. Also, airlines have unresolved pension funding issues that may further drag down results. However, even this tepid return to normalcy will be greeted with glee in most camps.

A big variable in these results is the price of oil, which affects all fairly equally apart from local taxes and cagey hedging plays. David Swierenga, former ATA chief economist and now an independent consultant, says that for US carriers, "jet fuel prices will decline from the 89 cents a gallon average for 2003 to 83 cents in 2004. That's not a big shift, and that's a very high price. The last time we had prices in the 80s was 1983-85. Things had bottomed out in 1998 when jet fuel was 50 cents a gallon."

Traffic demand will be there, forecasters predict. "At the beginning of [2003] we expected growth rates for the year of 7.5% on average around the world--but then war and SARS took its toll," says Peter Morris, formerly IATA's chief economist and now chief economist and head of Airclaims' Transport and Tourism Consultancy. "It is coming back to that ambient level of around 7.5%, so that says to me that [in 2004] we genuinely are going to see 7%-8% growth on average around the world, certainly on international."

JP Morgan's Jamie Baker warns that in the US, "2004 ASMs are likely to be within 1.5% of [the] 2000 peak, despite aggregate demand still down 15%-20%. Too many seats chasing few dollars in our opinion." Sweirenga puts US capacity growth at 4.5%-5%, "a lot of that through increased utilization and airplanes recalled to the fleet," putting the industry 6.5%-7% below 2000 levels. He adds that demand will lag capacity slightly, meaning a small drop in load factor.

IATA forecasts a 6.9% year-on-year increase in international passenger traffic in 2004, growing to 7.2% in 2005. Last August, ICAO predicted passenger traffic would rise 4.4% in 2004 and 6.3% in 2005.

Capacity will be coming back into the system around the world. …

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