Tough times?

This is significantly worse than IATA’s December forecast for a US$2.5 billion loss in 2009, reflecting the rapid deterioration of the global economic conditions.

Centre of Asia Pacific Aviation (CAPA) chief executive Derek Subudin said Singapore Airlines’ cut in ticket prices was the “force nine gale” as airlines turn to desperate measures to fill seats.

After the SARS outbreak in 2003, many Asian airlines offered 50 per cent discounts but those sales were heavily restricted and for travel windows lasting just a few weeks.

Subudin said that he expected other carriers to join in as “passenger numbers dwindled”.

“The international travel market is very soft and the kick up in the global economy hasn’t come as yet,” he said.

In February, Singapore Airlines recorded its worst ever decline in passengers with a 20.2 per cent plunge to 1.2 million, while cargo dropped 15.2 per cent.

“Singapore Airlines’s cut in ticket prices was the “force nine gale” as airlines turn to desperate measures to fill seats.”

Across the globe IATA reported a 10.1 per cent drop in passengers for February with cargo down 22.1 per cent.

IATA chief executive Giovanni Bisignani warned that “gloom continues”. “The priority for airlines around the world is survival — conserving cash and adjusting capacity to match demand,” he said.

Bisignani has called on governments around the world to lower the tax burden on airlines, saying officials “must replace the mindset of taxing aviation as a luxury or a sin with a strategic approach that recognizes and fosters the industry’s critical economic role in connecting people to business and products to markets”.

He added; “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. With an industry debt of US$170 billion, the pressure on airline’s balance sheet is extreme,”

IATA says that demand is projected to fall sharply with passenger traffic expected to contract by 5.7 per cent over the year.

What is worse is that revenue implications of this fall will be exaggerated by an even sharper fall in premium traffic.

Cargo demand is expected to decline by 13.0 per cent.

IATA says that both are significantly worse than the December forecast of a 3.0 per cent drop in passenger demand and a 5.0 per cent fall in cargo demand.

Yields are expected to drop by 4.3%.

Certainly lower fuel prices are helping to curb even larger losses and IATA expects fuel prices of US$50 per barrel, to cause the industry’s fuel bill to drop to 25 per cent of operating costs (compared to 32% in 2008 when oil averaged US$99 per barrel).

But there is more pain to be endured by the industry.

Cathay Pacific is expected to announce significant cuts to services during April, along with deferrals of aircraft.

It is rumoured that Singapore Airlines will defer some of its A380s in 2010 as it has told its 747 pilots they are required through that year.
Qantas is also expected to defer aircraft and an announcement is expected within two months.

However insiders do not expect the airline to defer its first 15 787s as suggested by the Sydney Morning Herald in March.

The Qantas Group has 737s, 787s, A380s and A320s on order and the 787 is to be the group’s flagship going forward.

Significant expansion plans for Jetstar are being built around the 787 and Jetstar is the only unit in the group that is actually expanding.

This year is quite possibly going to be the toughest ever experienced by the airline industry.

It is essential that the Australian government does everything possible to assist our airlines fly through what will be a very rough ride.
A good start would be to change the depreciation schedule for aircraft to one in line with its toughest competitors such as Singapore Airlines.