Darkening clouds have silver lining
Published: 23 Sep 2008
In the midst of last week's dramatic events on financial markets, British Airways (BA) chief executive, Willie Walsh, declared the airline industry was going through "a deeper, more protracted, more fundamental crisis than 9/11, the Gulf War or any of the previous shocks that have beset the industry since the age of mass air transport began in the 1970s".
Mr. Walsh repeated his warning that more carriers would disappear this Winter.
BA shares recorded their biggest one-day fall since September-11 on 18-Sep-08 of 10.8 percent, extending the stock's losses this year to 30 percent, although there was a sharp bounce-back with the broader market on 19-Sep-08 as news of the US government's planned massive intervention seeped out.
BA is in many ways at the epicentre of the crisis in Europe, as the London financial services hub takes a pounding from the financial market turmoil. Financial firms worldwide have cut around 120,000 jobs since the collapse of the US subprime mortgage market – and many more thousand lob losses are expected to follow - which is having a dramatic impact on business travel.
IATA warns of a "significant downward trend" in travel growth, as the economic environment worsens. The industry body added the sharp decline in premium travel most likely reflects a fall in business travel driven by the increasing weakness of major economies.
According to IATA, the recent Lehman Brothers' bankruptcy "underlines the shrinkage of M&A and other financial sector activity, leading of course to a reduced number of business travellers from financial services", while falling air freight volumes and lower business confidence "suggests that world trade and travel from the manufacturing sector is also in decline".
Worldwide premium demand fell 1 percent in Jul-08, following a -0.4 percent fall in Jun-08 and average growth of 1.5 percent during 1H08. IATA stated there is likely to have been some switch in business travel from premium to economy, "but all the evidence suggests this is a relatively price-insensitive sector".
The EU-US open skies agreement, and resulting influx of competition at Heathrow (particularly from cash-starved US carriers) has resulted in sharply lower fares on the Atlantic – where BA historically earns 50 percent of its profits. Amex TMC's latest Business Travel Monitor shows average business fares on London to New York Newark services fell 25 percent in the second quarter of this year, while London-JFK fares fell by 24 percent.
Pressure on fares is expected to remain intense for the remainder of this year and into 2009, as the European and US economies stagger. Cross-border premium travel within Europe shrank 7.4 percent in Jul-08, following a 6.9 percent reduction during the first half of the year.
Premium passenger numbers across the important North Atlantic market accelerated a little to +3.8 percent in Jul-08, from +1.7 percent in Jun-08 and +5.1 percent during 1H08. US Department of Commerce data had been showing that US travellers to Europe had been falling at a pace of 4 percent a year, while flows from Europe to the US had been rising at double figure rates. According to IATA, "given the fall in travel within Europe, the weakening economic situation and fall in the Euro, it is not obvious that the acceleration across the North Atlantic originated in Europe".
The souring conditions, punctuated by last week's dramatic events, however offer some potentially very powerful opportunities for BA. Blanket media coverage of the financial meltdown will make it easier for BA to ram through further restructuring moves.
The current environment also provides the perfect platform for Mr Walsh to sell BA's merger with Iberia and trans-Atlantic alliance with American Airlines to regulators. Even Ryanair CEO, Michael O'Leary, concedes the European Commission will "rubber-stamp" mergers in Europe as more carriers exit the market this Winter due to turbulent conditions.
For BA – and the rest of the airline industry – this crisis represents the best chance in decades for radical restructure and reform, to put the global industry on a much surer footing. The process however, will be an extremely painful one.
(By Center For Asia Pacific Aviation)
Comments
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Jim said on 26 Sep 08:
The "significant downward trend" in the airline industry should not be a surprise to anybody. All the leading indicators have been reported in the past several years in the financial press. But, like many people in all industries, airline executives have continued to hold unfounded optimism.
Rather than approving further consolidation, which does not lead to efficiencies, some governments should consider offering financial support to some of the better airlines so that they could survive the turbulence. Airlines are critically important to the economic health of all countries and it would make good sense to have government investment.