DVB is an international advisory bank and finance house, which specialises in the global transport market and one of the leading sources for shipping and aviation finance. The following is a synopsis of its third annual airline review. http://www.dvbbank.com
”In hindsight, after the extremely difficult year of 2001, 2002 turned out to be a short ”inter-bellum” as the first half of the year 2003 proved to hold major challenges to most members of the global commercial aviation community.
Although there was a reluctant start to the year, caused by the passengers” reaction to the then anticipated Iraq-war (which could still be seen as a consequence of the events of 9/11/01), the SARS outbreak that by 15 March 2003 resulted in a WHO emergency travel advisory took the airlines by complete surprise. The crisis lasted only about three months with the WHO removing its negative recommendation for travel to Beijing, China on 24 June, but its impact on especially Asian traffic was unprecedented.
With Asia considered to be the major growth area in commercial aviation, several months of severe negative traffic significantly impacted the global volume. In May, IATA reported a 21% drop in international scheduled passenger traffic, with Asia-Pacific carriers experiencing a 50.8% drop. Only in the second half of the year, did faces begin to smile, with IATA being able to report global scheduled traffic growth again in September. Overall, IATA expects a 3-4% drop in international scheduled traffic in revenue passenger kilometres (RPK) for 2003 turning into a 7-8% growth in 2004. International freight traffic performed better in 2003 with a 5% increase in volume.
Preliminary ICAO ” a UN agency ” figures for global air transport over 2003 indicate a 1% decrease in total RPKs, with a 3% decrease of international RPKs. Freight traffic, expressed in revenue tonne kilometres (RTK) increased by slightly under 4% during 2003. Overall, world traffic levels still remain about 2% below the last ”normal” year ” 2000.
With a recovery already starting during the second half of 2003, the industry outlook is more positive. According to ICAO (revised forecast January 2004), world traffic volume (in RPK) will increase by 4% in 2004 and even 5% in 2005.
The traffic volume for the European airlines only showed a moderate growth in 2003 with the Association of European Airlines (AEA) reporting only 0.5% growth (weeks 1-50). SARS caused the European airlines” Far East traffic to drop -7.2% whilst North Atlantic traffic showed a relatively healthy 4.5% growth. Intra European traffic however was stagnant (-0.1%). During 2003, the low-cost carriers (not represented in the AEA figures) showed a much better performance. Ryanair”s (having taken over Buzz from KLM) traffic volume expressed in number of passengers increased by 45% for the first half of its fiscal year ending 30 September 2003. Fellow low-cost carrier easyJet reported an increase in passengers of 79% (in RPM: 92%) for their year ending 30 September, although much of this was due to the acquisition of Go Fly.
The presence of an increasing number of low-cost carriers has a significant impact on the traditional network carriers as well as the traditional leisure charter airlines. Despite running at record load factors and having been relatively successful in reducing operating cost, the relatively low yields pushed airline breakeven load factors to levels never attained before.
European charter carriers had a difficult year as well, mainly caused by a depressed holiday market. Despite increased vertical integration and consolidation amongst tour operators, the big three (TUI, MyTravel and Thomas Cook) struggled especially during the first half of the year. In this climate, most business went to the in-house charter airlines (Hapag Lloyd, Britannia, Condor, Thomas Cook) putting additional pressure on those independent airlines that had not developed alternative strategies like seat-only sales. By doing so, the distinction between the low-cost carriers and these (ex-) charter airlines has become blurred. Toward the end of 2003, Aero Lloyd fell victim to this development and went into administration as did French airlines Aeris, Air Lib, and Air Littoral earlier in the year.
With all major airline alliances now incorporating members from at least Europe, Asia and the US, the outcome of the negotiations between the US and Europe over a transatlantic aviation agreement becomes critical as it will likely incorporate relaxation of ownership and control restrictions that will make it easier for EU and US airlines to enter into mergers and takeovers with each other. In November 2002, a series of open skies decisions between the USA and eight European nations had been ruled illegal by the European Court. Subsequently, in June 2003 the European Transport Council granted the EC a mandate to negotiate an aviation agreement with the US on behalf of all the EU member states.
US traffic volume did poorly during 2003 with a drop of 1,2% in RPK”s reported by the Air Transport Association (ATA) for the first 11 months compared to 2002 and by over 10% compared to the year 2000. As to be expected, ATA members recorded a significant drop in SARS-affected Pacific traffic (-11.6%). Transatlantic traffic was also down (-7.3%). Domestic traffic was stagnant with only a +0.8% increase but Latin American traffic showed a clear growth with +4.1%. As most US airlines cut capacity during 2003 (-3.7%), the average passenger load-factor increased from 72.2% in 2002 to 74.2% in 2003. During 2003, clearly the most difficult months were March-June when traffic volume dropped about 5.4% (YoY).
The US airlines received government support totalling US$ 3.1bn, including suspension of security fees till 30 September worth US$ 700m as well as US$2.4bn refund of security fees paid since February 2002. Despite this, over the first three quarters of the year, the nine US majors reported an operating loss of almost US$ 3.4bn and a net loss of almost US$ 4bn, with only Alaska, America West (transforming into a low-cost carrier) and Southwest (low-cost carrier) profitable on a net basis.
Clearly the worst hit area during 2003 was the Asia-Pacific region. The SARS virus caused an unprecedented drop in traffic during the first half of 2003. Amazingly, none of the Asian carriers were forced to file for bankruptcy protection, partly thanks to government support but also as a result of a more robust financial position compared to non-Asian competitors.
The outlook for 2004 and beyond seems significantly more positive than has been the case for a long time, albeit incidental factors have the potential to upset the market from one day to the other. Airline mergers and ever further reaching alliances are trends likely to continue in an effort to optimise economies of scale. With the domestic US and intra European markets now largely deregulated, the low-cost phenomenon spreading in Asia and intercontinental liberalisation high on the agenda (Transatlantic Aviation Agreement, Asia Australia fifth freedom talks) the number of protected market niches rapidly dwindles.
Orders for commercial jets increased in 2003, leaving 2002 as the low point in the current business cycle although deliveries remained depressed. DVB believes that out of the total 2,228 stored aircraft, about 600-800 will return to service eventually, leaving about 1500 noisy, elderly aircraft for permanent retirement”.