Air travel remained a large and growing industry worldwide until last year. This year, its prob lems are compounded by the adverse effect on the industry caused by the global financial crisis and lately the swine flu menace that is spreading from country to country. Adding to the worsening situation are fuel prices that are rising once again and may result in various airlines introducing or reintroducing fuel surcharges. British Airways and Air India are not alone in asking staff to take salary cuts or delays in them being paid.
However, air travel has not taken as hard a beating as expected. Business and leisure travelers continue to fly, although not as frequently as they used to. Governments have been taking steps to promote air travel as it facilitates economic growth, world trade, international investment and tourism.
Business travel in particular had maintained a rising graph as companies became increasingly international in terms of their investments, supply and production chains and customers. The rapid growth of world trade in goods and services and international direct investment also contributed to growth in business travel.
“The economic meltdown has created difficulties. However, with every crisis comes an opportunity,” says Abdul Aziz Mangera, Lufthansa’s Jeddah-based regional manager for Western Province. “There is no doubt that 2009 will be a challenge, but we are ready to face it,” he said. “This is our opportunity to capitalize on the crisis and therefore we have invested in this market with additional capacity,” he said, adding that the German and Swiss national carriers together (both are part of the Lufthansa Group) have become more innovative in a bid to continuously increase their efficiency and improve their in-flight and ground products.
Lufthansa Group’s operating profit in 2008 stood at 1.35 billion euros. Its net profit was posted at 599 million euros, down 64 percent on the previous year. Despite the fact that the carrier expects even gloomier figures this year, it is putting a brave face on it. “This represents an outstanding result and its quality is underlined by the fact that it has been achieved during a time of global economic crisis,” Mangera explains, quoting Lufthansa Chairman and CEO Wolfgang Mayrhuber. “It’s a company in which a strong team, strong products and a strong balance were decisive in ensuring success.”
Airlines, impacted by the world financial crisis and turbulent fuel costs, have been restructuring their assets in the face of reduced traffic and the high cost of operations. “Some such (legacy) airlines have been resorting to measures like reducing the size of aircraft to destinations with reduced passenger loads, and using part of their fleet for charter services,” says Peter Spencer, managing director of British airline BMI, which is in the process of a protracted and, in the present economic climate, less than enthusiastic takeover by Lufthansa.
“Legacy carriers are experiencing a reduction in traffic volumes and have reported an overall drop in sales by 30 percent. Passenger traffic is down by 10 to 15 percent. As a result, some airlines have cut their capacity ranging up to 15 percent,” Spencer said, adding that the next nine to 12 months will be difficult for every carrier.
Spencer singles out the Middle East as an exception where the travel trade is not affected as much as in most of the Western world. “The Middle East is doing well as is evident from the growth in our operations, especially to Saudi Arabia, Syria, Jordan, Lebanon and Egypt,” he says.
In the past decade, air travel has grown by up to 10 percent a year, depending on the country. Travel for both business and leisure purposes grew strongly worldwide. Scheduled airlines carried over two billion passengers last year.
In the leisure market, the availability of large aircraft made it convenient and affordable for people to travel further to new and exotic destinations. Governments in developing countries realized the importance of tourism to their national economies and encouraged the development of resorts and infrastructure to lure tourists from the prosperous countries in Western Europe and North America. In the case of Saudi Arabia, there has been the remarkable growth of religious tourism, funded by increasing prosperity of Muslims around the world and who can now comfortably afford to go on pilgrimage. Moreover, as the economies of the Kingdom and other developing countries grow, their own citizens are already becoming the new international tourists of the future.
Nevertheless, the International Air Transport Association (IATA), which represents some 230 airlines comprising 93 percent of scheduled international air traffic, has revised its airline financial forecast for 2009 to a global loss of $9 billion. This is nearly double the association’s March estimate of a $4.7 billion loss, reflecting a rapidly deteriorating revenue environment. IATA also revised its loss estimate for 2008 to $10.4 billion from the previous estimate of $8.5 billion. “There is no modern precedent for today’s economic meltdown. The ground has shifted. Our industry has been shaken. This is the most difficult situation that the industry has faced,” Giovanni Bisignani, IATA’s director general and CEO said in his address to 500 of the industry’s top leaders gathered in Kuala Lumpur for the 65th IATA Annual General Meeting and World Air Transport Summit recently. After Sept. 11, he added, revenues fell by seven percent. It took three years to recover lost ground, even on the back of a strong economy. “This time we face a 15-percent drop — a loss of revenues of $80 billion — in the middle of a global recession. Our future depends on a drastic reshaping by partners, governments and industry. We cannot bear the cost of government micro-regulation, crazy taxation and partners abusing their monopoly power,” he said.
Recession is the most significant factor impacting the industry’s bottom line. IATA’s revised forecast sees revenues declining an unprecedented 15 percent ($80 billion) from $528 billion in 2008 to $448 billion in 2009.
Air cargo demand is expected to decline by 17 percent. In 2009, airlines are forecast to carry 33.3 million tons of cargo, compared to 40.1 million tons in 2008. Passenger demand is expected to contract by eight percent to 2.06 billion travelers compared to 2.24 billion in 2008. The revenue impact of falling demand will be further exaggerated by large falls in yields — 11 percent for cargo and seven percent for passenger.
The industry fuel bill is forecast to decline by $59 billion to $106 billion in 2009 (which will probably impact on oil prices). Fuel will account for 23 percent of operating costs with an average price of oil at $56 per barrel (Brent). By comparison, the 2008 fuel bill was $165 billion (31 percent of costs) at an average price of $99 per barrel.
“The risk that we have seen in recent weeks is that even the slightest glimmer of economic hope sends oil prices higher. “Greedy speculation” must not hold the global economy “hostage” again: That is the view of at least one industry leader in Jeddah.
Over the last decade, labor productivity in the industry improved by 71 percent. Fuel efficiency increased by 20 percent and load factors rose by seven percentage points. The dramatic downturn in demand could push nonfuel unit costs higher, which cannot be cut in proportion.
“Stronger cash reserves and careful capacity management are among that key factors that need to be focused on,” the industrialist says. One other glaring hope for airlines to survive in this turbulent scenario is consolidation across political borders (such as Air France-KLM, Lufthansa-Swiss, Delta-Northwest, Cathay Pacific-Dragonair) that has created stronger players. “But archaic limitations on ownership continue to prevent broader consolidation and partnerships across borders,” he believes.
The industry crisis is making liberalization even more critical. “We cannot manage in these unprecedented times with one hand tied behind our back. Airlines need the same commercial freedoms that every other industry takes for granted-access to global markets and capital,” an IATA spokesman explains.
One encouraging factor in the aviation industry is that there were fewer accidents in 2008. The total number of fatalities from aviation accidents dropped from 692 in 2007 to 502 in 2008.
This resulted in a 56 percent improvement in the fatality rate from 0.23 fatalities per million passengers to 0.13 per million passengers. This year, so far, the figure is 348 deaths in commercial passenger planes, the large bulk perishing in the Air France tragedy at the beginning of the month.