The contraction of fleets around the world continues as operators drop unprofitable routes and seek to balance supply with demand.

The number of aircraft in storage, parked, and being advertised continues to rise. Latest figures from OAG Aviation Services saw over 670 jet aircraft being advertised for sale or lease in late September 2009, a near 50 percent increase in the ten months from December 2008. The weakest point of the aviation year is now upon the industry. The Christmas period traditionally sees a severe shortage of capacity for passengers, but operators are unlikely to introduce additional services and instead hike fares. The New Year will see a fall in demand and operators will once again park aircraft or seek to wet lease surplus equipment and crews. While the world economy may be emerging from recession, aviation will take longer to recover. Leisure travelers will anxious to preserve disposable income and company travel budgets will remain restricted, particularly in the context of premium travel, so vital for international airline profitability.

The latest results from Lufthansa underline the problems facing the major airlines. For the nine months ending September 2009, the airline made an operating profit but was less than enthusiastic about the state of the market. The all important business class segment was considered to have stabilized in recent months but revenues remained low even if load factors were high for the German airline. Higher load factors should translate into higher fares as passengers find difficulty in booking seats. With this recession, customers prefer to fly in other classes rather than pay high business class fares.

The massive restructuring of Japan Airlines is another indication of the problems facing the industry. The airline is seeking to shed some 20 percent of its workforce and a large number of international routes will be cut. With a fleet of over 200 aircraft, the contraction of JAL will involve the disposal of a number of aircraft while at the same time reducing the appetite for new aircraft. The labor problems at British Airways stem from a management plan to cut costs and introduce new working practices which will likely see a reduction in capacity. Data from Aviation Strategy indicates that traffic levels for Air France/KLM, BA, Iberia, Lufthansa, SAS, Alaska, American, Continental Southwest, United, US Airways, JetBlue, Cathay all saw a drop in capacity for the three month period to June 2009 compared with the same period in 2008. For the first eight months of 2009, the Association of European Airlines reported a four percent fall in international capacity compared to 2008. These reporting periods are among the strongest parts of the year for the airline industry. With winter in the Northern Hemisphere fast approaching, the falls in capacity will likely not be reversed.

With the major airlines having already cut existing capacity either in actually disposing of aircraft or simply parking surplus equipment, attention is now on outstanding orders. Orders are being deferred rather than cancelled. Manufacturers have to find alternative custom for gaps that are emerging as a result of deferrals and this can result in lower net pricing for customers able to take delivery in the near term. The difficulty in finding finance remains, reducing opportunities for those second tier airlines that may possess the demand but not the resources to acquire unwanted aircraft.

While there are a myriad of airlines around the world that are still taking aircraft and indeed, are expanding operations, the major airlines still operate a sizeable portion of the worlds’ fleet. The contraction of fleets and deferral of outstanding orders has a major effect on aircraft values, not least in the widebody sector. In the years following 2001, the recovery in values was constrained by the on-going problems experienced by the U.S. airlines. Values of aircraft have on average fallen by more than 20 percent over the course of the last eighteen months. The lag between the recovery of the economy and the recovery in the airline industry will likely see another ten percent fall on values through to 2010. This will be largely caused by the difficulties that the major airlines will face in the coming months. This will limit the ability to stabilize fleet sizes. The demand from other sectors, particularly in the international arena, will not be sufficient to take up the slack and precipitate a reversal for values. The likely rise in fuel costs associated with economic recovery will only undermine any improvement in fortunes.

However, in view of the tight control on costs, the high load factors, the return to profitability will likely be swift, particularly if expansion of capacity takes second place to yield improvement. Adding capacity too quickly to meet demand will only dilute yields.