Some would say that headline is not news and they would be right since we have been hearing about the growing economic disaster in the airline industry for about a year. But a combination of statistics released this morning and yesterday as well as earlier this week make you want to just stay in bed. Of course, we know the industry is in trouble but those statistics quantify it so we know just how bad we should feel, as if that is necessary. What is worse, however, is that fact that the industry is helpless in the face of it as falling revenues overwhelm new fees and threaten much needed infrastructure investment.

Passenger and freight statistics, released this morning, compounded the dismal forecast laid out earlier this week by the International Air Transport Association (IATA). However, the good news is that U.S. carriers are still projected to clear a profit this year, despite deep discounting over the past few months and into May. While the organization said cargo is stabilizing, the drop was still over 20 percent for the third consecutive month.

Compounding the IATA stats are predictions from EUROCONTROL that the economic crunch will reduce air traffic by nearly 5% of flights in 2009, according to its latest short-term forecast released yesterday. The agency said that the weak trans-Atlantic traffic has wiped out any benefits of the EU-US Open Skies agreement which came into effect last spring.

Over the coming year, falls in the number of flights will continue across the board, with some countries, such as France, Italy, Spain, Germany and Sweden set to take the brunt.

According to the forecast, the decline in traffic affects all sectors. “Even the low-cost market is not immune – in November 2008 it saw its first 12-month decline in 15 years and in February saw 5% fewer flights than February 2008 (even allowing for the leap year),” said the agency. “The business aviation market is also declining – down by 21% in February 2009 compared to February 2008. The economic crisis is affecting air traffic on three fronts: reduced output and incomes means fewer goods to ship and lower demand for air travel; secondly, credit difficulties have hindered restructuring and investment by aircraft operators and contributed to bankruptcies; and finally recent migration flows within Europe, which had brought an increase in air travel, now appear to be reversing.”

“As passengers look for cheaper ticket options, yields are falling and load factors remain weak despite airlines cutting capacity in the winter,” said David Marsh, Head of Forecasting at EUROCONTROL. “All of these factors suggest that this decrease will not be short-lived and the recovery in traffic growth is not expected before the end of 2009 with, at best, weak growth in 2010.”

Further complicating the picture are Department of Commerce statistics showing international arrivals fell below pre-9/11 levels. The report prompted the U.S. Travel Association to renew calls for a nationally-coordinated travel promotion program to attract new visitors. “Overseas visitors to the United States spend an average of $4,000 per person, per trip and are critical to America's economic recovery,” said the organization, yesterday.

"Without a travel promotion program, America is leaving money on the table," said President and CEO Roger Dow. "Our nation is locked in an economic crisis to which overseas visitors hold a key. It is time for Congress to take immediate action as today's global economic crisis and America's strengthening currency will further weaken America's standing as a premier travel destination."

He called for the passage of a travel promotion bill, similar to that introduced in the House last year, which would not have cost the taxpayers a dime. “Studies show that such a campaign would attract millions of additional overseas visitors per year, resulting in billions of dollars of new visitor spending,” he said, noting a Senate companion bill, co-sponsored by a majority of U.S. Senators, did not receive a vote. He added a new Travel Promotion Act is expected to be reintroduced in the 111th in the coming weeks.

Cargo, Pax Stats Tell Grim Story
IATA said this morning passenger volumes fell sharply to 10.1% below 2008 levels (from the -5.6% recorded in January). The 5.9% reduction in capacity - the most aggressive since the crisis began - could not keep pace with the fall in demand, pushing the February load factor down to 69.9% (3.2 percentage points below the same month in the previous year).

February international freight volumes were 22.1% below 2008 levels. This is the third consecutive month at more than 20% below previous year levels (-23.2 in January and -22.6% in December).

“Gloom continues,” said IATA’s Director General and CEO Giovanni Bisignani. “The sharp drop in February passenger traffic shows the broadening scope of the crisis. Freight traffic, which began its decline in June 2008 before passenger markets were hit, has now had three consecutive months in the -22% to -23% range. We may have found a bottom to the freight decline, but the magnitude of the drop means that it will take time to recover.”

Passenger
The decline in demand for international travel outpaced capacity adjustments in all regions.
African carriers saw the largest demand decline (-13.7%), outpacing even the most aggressive capacity cuts (-11.8%).

Asia-Pacific carriers saw passenger traffic decline by 12.8%, far outstripping the -7.8% capacity adjustment. The region’s export dependant economies continue to suffer, impacting both business and leisure travel - particularly to long-haul destinations. While this may be somewhat exaggerated by Chinese New Year (which took place in January 2009 and February 2008), the sharp downward drop from the -8.4% recorded in January shows the deepening impact of the crisis on this region.

North American carriers recorded a 12.0% drop in demand, also outpacing an aggressive -7.1% capacity adjustment. Consumer confidence remains low in what is traditionally a weak month for travel.

Europe’s carriers saw traffic fall in line with the global average at -10.1%. Long-haul markets to the US and Asia have been particularly hard hit reflecting negative economic sentiment such as that seen in Germany where business confidence hit new lows in both February and again this month.

Signaling a lesser recessionary impact in Latin American, statistics show carriers most closely matched demand drops (-3.8%) with capacity adjustment (-2.4%). A slowdown in commodities is impacting trade - particularly with the US and Asia.

Middle East carriers bucked the trend of falling demand with an increase of 0.4% in international passenger traffic. But an aggressive capacity increase of 7.3% drove load factors down 4.7 percentage points to 68.1%.

Cargo
IATA tried to put a positive spin on the cargo front when it said that the level of air freight appears to have found a floor over the past three months. Even so, all cargo markets saw extremely weak demand continue, it said.The recently released Eurozone Purchase Managers Indices, being useful forward looking indicators for cargo traffic, showed a slight and unexpected improvement in March - although it remained in negative territory.

Middle Eastern carriers experienced the smallest fall in demand (-4.8%). They were also the only region to increase capacity (+5.4%). African carriers had the worst performance with a 30.7% drop in international freight traffic due to a loss of market share on long-haul routes combined with the impact of the economic downturn.

Asian carriers - the largest players in cargo - saw demand fall by 24.7% as the region’s high-value export-dependant industries were hard hit by falling consumer demand in the major markets of Europe, the US and Japan. Japanese exports have almost halved from February 2008 levels.

European and North American carriers saw cargo demand decline 23.1% and 21.8% respectively. Government stimulus plans have not yet rekindled consumer demand. Latin American carriers experienced a demand drop of 22.8% driven by weakening demand for the region’s commodities.

World’s Airlines in Intensive Care
Earlier this week IATA said it expects the world’s airlines to collectively lose $4.7 billion in 2009, far more than the $2.5 billion it had originally forecast at the beginning of the year, reflecting a rapid deterioration of global economic conditions.

Bisignani said the massive amount of ‘red ink’ will put extreme pressure on the industry’s balance sheet. The only bright spots in his particularly grim assessment was the fact that U.S. air carriers will be profitable in 2009 because of capacity cuts implemented late last year and the fall in oil prices.

“Fuel is the only good news,” said Bisignani. U.S, airlines are expected to turn a loss of $5 billion last year into a profit of about $100 million in 2009. This, despite the fact that the deep discounting during the first quarter led some to believe that it would derail such prospects.

Falling fuel costs are helping to curb even larger losses among the world’s airlines. With an expected fuel price of US$50 per barrel – $10 below previous IATA assumptions – the industry’s fuel bill is expected to drop to 25% of operating costs (compared to 32% in 2008 when oil averaged US$99 per barrel). Combined with lower demand, total expenditure on fuel will fall to US$116 billion (compared to US$168 billion in 2008).

“But the relief of lower fuel prices is overshadowed by falling demand and plummeting revenues,” said Bisignani. The industry is in intensive care. Airlines face two immediate fundamental challenges: conserving cash and carefully matching capacity to demand.”

To make matters worse, IATA, which represents some 230 air carriers, has revised its 2008 loss projection from US$8.0 billion to US$8.5 billion. At one point early last year, the loss prediction was pegged at only US$5.0 billion. The fourth quarter of 2008 was particularly difficult as carriers reported large hedging-related losses and a very sharp fall in premium travel and cargo traffic.

Industry revenues are expected to fall by 12 percent (US$62 billion) to US$467 billion. By comparison, revenues declined after the events of Sept. 11, 2001 by US$23 billion over the period of 2000 to 2002 (approximately seven percent).

“The state of the airline industry today is grim. Demand has deteriorated much more rapidly with the economic slowdown than could have been anticipated even a few months ago. Our loss forecast for 2009 is now US$4.7 billion. Combined with an industry debt of US$170 billion, the pressure on the industry balance sheet is extreme,” said Bisignani.

In December, IATA expected to see only a three percent drop in passenger demand and a five percent fall in cargo demand. Passenger traffic is likely to drop 5.7 percent and cargo traffic by 13 percent.

“Demand has fallen sharply. In January, passenger demand fell 5.6 percent exaggerated by a 16.7 percent fall in premium traffic, where airlines make their money,” believes Bisignani. “An even bigger indicator is cargo, 23.2 percent down in January…We can fully expect that the economic downturn will get worse before it gets better.”

Jobs in Free Fall
With the drops in traffic and profitability, airlines are shedding jobs, terminating unprofitable routes and parking passenger jets to make it through the deep worldwide economic recession.

Bisignani said the regional differences are pronounced. Asia Pacific carriers continue to be hardest hit by the current economic turmoil and they are expected to post losses of US$1.7 billion. Demand for passenger seats to and from China is expected to contract by between five percent and 10 percent over the year. India, whose market for international air services tripled in size between 2000 and 2008, is expected to see capacity increase by 0.7 percent in 2009, while demand drops between two percent and three percent. Overall, the region is expected to see a 6.8 percent fall in demand but only a four percent drop in capacity.

European carriers are expected to lose US$1 billion in 2009 while Latin American airlines are forecast to suffer losses of US$600 million, the same as airlines on the Africa continent. Middle East air operators can expect to see US$900 million in red ink.

“The prospects for airlines are dependant on economic recovery. There is little to indicate an early end to the downturn. It will be a grim 2009. And while prospects may improve towards the end of the year, expecting a significant recovery in 2010 would require more optimism than realism,” said Bisignani.

He believes “recovery will not come without change. There is no doubt that this is a resilient industry capable of catalyzing economic growth. But we are structurally sick. The historical margin of this hyper-fragmented industry is 0.3 percent. Bailouts are not the prescription to return to health.”

The move of U.S. air carriers to cut overall capacity in the face of a major drop in the number of traveling passengers, which has improved their bottom line, is reflected in shrinking employee rosters.

According to the Department of Transportation, U.S. airlines employed 6.9 percent fewer workers (390,000) in January than they did a year earlier, the seventh consecutive year-over-year decrease and the largest decline since December 2003.

All the legacy airlines reduced employment from January 2008 to January 2009 as did low-cost carriers AirTran Airways, Frontier Airlines and Spirit Airlines. Regional carriers American Eagle, SkyWest, ExpressJet, Comair, Atlantic Southeast Airlines, Horizon Air, Mesa Airlines, Executive Airlines, Shuttle America Airlines, Republic Airlines and PSA Airlines also reported reduced employment levels compared to last year.

Scheduled passenger airlines include network, low-cost, regional and other airlines. The seven network carriers employed 263,900 workers in January, 67.7 percent of the passenger airline total, while low-cost carriers employed 16.1 percent and regional carriers employed 14.6 percent. Employment at the seven network carriers decreased 6.3 percent in January 2009 compared to January 2008, the fifth monthly decrease from the same month of the previous year after 16 consecutive months of year-over-year growth.

The low-cost carrier workforce declined 3.1 percent in January from January 2008, the fourth consecutive monthly decline for the group. But four no frills carriers reported year-to-year increases: Virgin America, 71.1 percent; Allegiant Airlines, 15.1 percent; Southwest, 3.9 percent and JetBlue Airways, 1.1 percent. AirTran, Spirit and Frontier reported year-to-year employment cuts.

Finally, regional carrier employment declined 7.1 percent in January 2009 compared to January 2008.