Air Transport World

2003: more of the same; with a slow recovery ahead, structural problems and global uncertainties blunt benefits from economic growth. (Forecast).

ATW Senior Editor Geoff Thomas contributed to this report.

This year will be more of the same, very similar to the last half of 2002, improving only slightly. ATW has discovered an industry consensus for this outlook that seems to be equally applicable around the globe.

The second half of last year and the newly arrived year appear to be forming a seamless period for the airline industry that can be viewed as a time of growth and opportunity for some, a time to sustain operating economies while awaiting a turnaround for others, and, for the most troubled, a rime of unmitigated disaster necessitating a complete business model teardown. Today, more than in any period in recent memory, a determination of the state of the airline industry depends heavily on location and business model.

In the Asia/Pacific region, growth is the game and profits are common, with the notable exception of Japan's airlines, where the region's largest economy is mired in a prolonged recession. In Europe, airlines sharply downsized to find that even though their traffic is depressed, yields are holding to the extent that many carriers are keeping their heads above water despite a general economic malaise.

It is in the biggest airline market, North America, where a full range of experiences may be found, most notably the decimation of the US full-service network carriers, their performances sucking the life out of industry averages and practically by themselves taking the consolidated global industry statistics deeply negative. Yet North America has a number of bright spots, including profits and growth for most of the low-fare and Regional airlines.

Maurice Flanagan, Emirates CEO, says world airline performance "has been a disaster in average global terms, but largely because the global average is so heavily influenced by the collapse of US traffic. The further you go from the US, the less representative is the global average--[Singapore Airlines, Qantas, South African Airways, Emirates] had very profitable years, and even in US the picture was uneven.

Frederick W. Reid, Delta Air Lines President and COO, says, "It is a curious moment. My having lived more than two-thirds of my life outside the States and having been president of Lufthansa, I can't think of another time when the Europeans and the Asians were doing fairly well and the US industry was on its knees."

Clouding the hope of even marginal improvements this year are the nearly infinite permutations of various Middle East war scenarios, a wild card in everyone's mind and plan. In fact, to save space and words in this report, assume that following each forecast statement, every quote, is the qualification, " ...unless there is war or another major terrorist attack."

The tentative growth of the global economies seems as regionally fragmented and fragile as today's airline industry results. What modest growth had been expected outside the Asia/Pacific region has been thrown into doubt by a recent softening of recovery expectations (see box, p. 27).

The next most commonly heard comment in the industry is that waiting for the economy to turn around and bring salvation is a loser's game, making essential a concentrated attack on costs. "The biggest thing in forecasting the rebound is this idea that if we hang on the whole thing will turn the corner," says IATA Chief Economist Peter Morris. "If we look at the way in which GDP forecasts are gradually softening, you don't see that corner is going to be turned rapidly. And GDP is such a slow driver to get going again, you say hang on, the business is going to collapse before this turn occurs that you're aiming for."

Further bad news for US carriers is a profound change in traditional air travel spending patterns. According to ATA statistics, US airline revenue traditionally has been 0.9% of the gross domestic product. Most of last year saw that figure remain below 0.75% of GDP and the forecast says 2003 will not hit 0.8% until the fourth quarter. And long-term spending on air travel may stay below 0.85%.

American Airlines VP and Comptroller Doug Herring is well acquainted with that disconnected mechanism. "Until about a year ago I could look at next year's forecast GDP, next year's forecast industry capacity, CPI and fuel prices and I could tell you what our unit revenue would be and I'd be pretty damn dose," he says. "Can't do that today. Over the course of [last] year, the GDP and unit revenue have disconnected--they're totally out of synch, and I'm not quite sure if and when they're going to reconnect.

As the industry claws its way back, it can find little solace in its experiences of a decade ago when Gulf War recession losses were recouped quickly by the surviving airlines luxuriating in the booming dor.com bubble. This recovery will be gradual, all agree. A return to 2000 traffic levels won't come until this year on a global basis, 2004 for US carriers. As for profits in the US, those will follow traffic by a year. …

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