Abandon Hope, All Ye Who Enter Here

That’s the crux of the message borne by the International Air Transport Association in reporting worldwide airline stats for May which, for the first time suggested that the industry may be in a period of “deglobalization.” Its Business Confidence Survey suggested some don’t expect recovery before 2011. Unsurprisingly, the organization cited uncertainty about fuel prices and the timing of any recovery as reasons and reiterated Q1 losses of $3 billion.

Travel deteriorated further in May in Asia despite early recovery signs, said IATA, citing H1N1, which, it said, accounted for about one point of decline in May. It suggested, with individual governmental recovery packages focusing away from international cross-border capital flows, in favor of domestic production, there was “potentially also a worrying sign of ‘de-globalisation’” as business travel dampens further.

“The deterioration in international air travel in, to and from Asia during May, despite recovering economies in the region, is a worrying sign of what is being called de-globalization,” said the Geneva-based airline group. “Perhaps because the economic recovery [in Asia] is focused on generating a domestic recovery in each economy, the boost to international travel is more limited.”

Analysts at the Center for Asian Pacific Aviation jumped on suggestions of de-globalization. “If IATA’s warning about ‘de-globalisation’ forces play out, the airline industry as we know it is indeed in considerable strife,” it said. "The Center’s view is that there are numerous conflicting interpretations that can be made of statistics emerging on the back of the various government interventionist packages. This judgment is based on the absence of any clear sign that the airline industry – typically a very useful forward indicator – has yet turned the corner.”

IATA noted that Asia’s private sector does not carry the overwhelming debt burdens of its North American and European counterparts and, for that reason, is expected to lead the recovery. It added, “There is a danger here that the boost to other economies through trade and capital links will be reduced.”

But CAPA noted that the Chinese domestic traffic growth, though weak compared to 2008, is “largely driven by very significant discounting and against the background of great largesse from Beijing. This is not the same as a recovery; it is more like a good adjustment to continuing difficult conditions.” Thus it cannot be relied on as a solid economic indicator since it is “wholly dependent on the government’s fiscal intervention.”

CAPA expects subsequent traffic data reports to clarify the picture “especially when freight bookings for the pre-Christmas 2009 quarter start to show,” it said. “Carriers like FedEx remain extremely cautious on this front, while key Asian carrier cargo yields continued to deteriorate last month. If the shattered air freight market does not recover strongly over the next three or four months, we will know we are in for a long struggle.”

IATA's comments on its business confidence outlook is just as disturbing. “The glimmer of optimism about financial performance for the coming 12 months seen in April’s survey has faded as respondents, on balance, indicate further declines in profitability ahead,” said IATA yesterday. “Even the optimistic respondents don’t see significant recovery before Q4 this year and others not until early 2011. In light of the extreme pressure on yields seen over the last three months one could add excess capacity to this list of concerns. In contrast to previous surveys, airlines in Asia on balance expect stabilization of profitability while European carriers along with those in the Americas are more pessimistic with the balance expecting decreases in profitability.”

Premium Travel Takes Deeper Dive
Premium travelers dropped by 23.6% in May for the 12th consecutive month and more than the 22% decline in April and the 19.2% decline during the first quarter. Economy travel numbers were also down, by 7.6%, and total passenger numbers on international markets were down 9.2% in May after a fall of 8.2% in the first quarter.

Within the Far East premium travel was down 31.6% in May, across the Pacific down 30.7% and from Europe to the Far East down 26.3%; all following rather smaller declines in the first quarter. The impact of H1N1 on air travel was shown more clearly in the 62.4% fall in total passenger numbers within Central America during May. Showing signs of stabilization, but not revival as yet, were the large transatlantic and the within-Europe travel markets. On a more optimistic note, premium travel decline across the Atlantic is slowing having fallen by 16.5% in May, compared to 18.4% in April and 17.8% in Q1.

“Passenger travel numbers in May cast doubt on the view that a bottom to the travel decline has been reached,” said the organization. “The stabilization seen earlier in passenger kilometers flown now appears to have been due to a small rise in the average distance flown, due to the geographical pattern of changing travel markets, and not to a stabilization of passenger numbers. There are some promising signs but passenger numbers were still falling in May.”

IATA called the picture across the regions mixed with the only unambiguous signs of growth in the African cross-border markets and the Chinese domestic markets with the growing economies accounting for a 1.1% increase in premium travel in May. “Markets from Europe-Middle East and Middle-Far East are growing for economy travel,” it said, suggesting it may represent a shift by business travelers to the back of aircraft. It also suggested that Middle Eastern airlines were gaining a larger share of the Europe-Far East business rather than reflecting an overall of demand revival.”

Both passenger and cargo traffic volumes continued to fall over the last three months, however expectations for the year ahead are for more stability from now on, IATA reported, adding expectations for yields remain weak for both sectors. While costs are falling now, that is not expected to last in the coming year.

Confidence Decidedly Pessimistic
Continued declining demand was reported by 68% of respondents to IATA's business outlook, with 20% seeing improvements, but that was a drop of five points from the April period. In addition to the recession, tight business travel budgets and leisure travelers making other plans, respondents cited the H1N1 virus.

“With international traffic down 9.3% in May, there is little to indicate that a sustained recovery is imminent,” said IATA. “A third of respondents expect demand over the next 12 months to fall further (up from a quarter last survey) while just under 40% expect an improvement.”

The organization suggested that cargo declines may have hit bottom. “Recent traffic results indicate that a floor may have been reached during the first half of the year with international FTKs bottoming out at around -20%,” it said, adding that more than half of respondents expect cargo traffic to begin rising over the next 12 months. “Airlines in Asia, with a heavy exposure to the cargo market, now expect improvement in demand with 86% of respondents from that region in the affirmative.”

Saying oil was already over 50% more expensive than the 2008 low, IATA noted it was well below last year’s peaks. While costs continued to decline, respondents expect them to rise. “Fuel prices are significantly below their record levels and this has now fed through to the bottom line for most airlines as previous hedges have come off,” said IATA. “Many have also realized cost savings associated with capacity reductions or route restructuring. Some respondents report success with labor contract renegotiations and in revised agreements with suppliers.

“Expectations for the next 12 months have now shifted back to input cost increases over that period, with 42% of respondents (four times the number from last survey) expecting upward pressure,” it continued. “The mixed blessing of potential economic recovery is seen here – recovery may well be good for traffic growth down the line but, ahead of that, fuel prices are likely to rise on expectation of increased energy demand as economic activity accelerates.”

Despite valiant efforts to cut capacity, IATA reported that they have come at about half the rate of declining traffic, putting severe pressure on yields in order to fill seats. “Respondents were unanimous in reporting declines in yield performance for the passenger business during the last three months and the outlook for the year ahead remains pessimistic,” it said, citing a combination of factors including lowering of fuel surcharges, H1N1 and passengers trading down from premium to economy seats contribute to the decreases in passenger yields over the last three months. “However, the overriding concern for many is the effect of excess capacity. The expectations of respondents for the next 12 months remain in negative territory with still half expecting further yield declines versus 31% seeing an improvement in performance.”

Likewise, cargo yields also suffered heavily over the last three months with more that 95 percent of respondents reporting decreases as demand has fallen far more sharply than capacity, as on the passenger side. However, there is far more optimism on the cargo side with the 12-month outlook calling for more yield stability, said IATA, adding, the “cargo side of the business may again lead the upturn – when it arrives.”

With more than 31,000 employees having been shed in just the U.S., more is expected judging from this week’s announcements. “Equal numbers of respondents (46%) expect to decrease or hold employment levels steady while less than 8% expect to take on more staff,” said IATA, noting the seriousness of the crisis because airlines otherwise are heavily unionized and reluctant to cut skilled workers. “The last survey there were still 20% of respondents expecting to expand their workforce.

IATA May Statistics
• Passenger kilometers flown on international markets fell at a faster pace of 9.3% in May, following the more moderate 3.1% decline in April and the 11.1% March fall.

• But there is now tentative evidence that the low point in passenger travel volumes may have been reached in March. Although still much lower than last year, the level of passenger kilometers flown in May were marginally higher than levels in March and should remain steady unless the flu increases, something the World Health Organization indicated when it said cases were now growing too numerous to count. Swine flu or influenza H1N1 had a clear negative impact on passenger demand for airlines in Latin and North America and some effect on Asia Pacific airlines.

• The impact of the recession appears to stabilizing but strong headwinds from debt and low asset prices are expected to weaken and delay any significant recovery.

• Air freight ton kilometers flown were down 17.4% in May, compared to a decline of 21.7% in April. Freight volumes had been moving sideways from month to month since hitting their low point in December. May marked the first month of noticeable improvement, as manufacturers increased shipments, beginning to add to inventories in anticipation of economic recovery.

• Despite the apparent stabilization of travel and freight volumes the same is not true for revenues. Passenger and freight yields are falling at an accelerating pace as excess capacity emerges, intensifying competition. As capacity cuts continue to lag behind the slump in demand, passenger load factors fell by 3.3% points in the 12 months to May, while freight load factors fell a further 3.6% points. We estimate that passenger revenues on international markets fell by 25-30% in May, following a decline of around 20% in the first quarter.