Aviation Strategy Issue No: 155 September 2010 Up, up and ...? CONTENTS he air transport industry is remarkably resilient. It can get knocked Toff its long term growth path by extraneous events, but bounces back. The global recession sparked off by the collapse of Lehman Bros two years ago had a dramatic impact on the industry: 2009 saw a Analysis decline in overall traffic volumes of 3-4%, with a slightly higher rate of decline in international traffic, to mark only the second year in the Traffic and yields industry's history that traffic had actually fallen. Yields however col - in the upturn 1-2 lapsed by an astonishing 13% - the largest annual decline experienced in the industry's history, although partly because fuel prices also fell in the period – and it is estimated that the industry generated an operat - Leasing market in recovery mode: ing loss of $1.2bn and a net loss of nearly $10bn for the year. Annual survey of the major players We are now surely in the upturn of the cycle. Since the beginning and new entrants in aircraft leasing of 2010 the year-on-year rate of growth has been far better than 3-13 many might have expected – with the exception of the disruption caused by the closure of European air-space in April following the eruption of an unpronounceable Icelandic volcano. IATA has report - Briefing ed an average growth in RPKs of 8% on international traffic since January against a relatively muted growth in capacity. Load factors LAN/TAM merger: rebounded to over 80% in July, three points higher than the previous Two local leaders become year, while the average improvement in load factors so far this year global LATAM 14-19 has averaged five percentage points. These increases of course are in light of a comparative period of severe declines but June traffic appeared to have had regained the peak levels of 2008. Databases 20-23 Premium passengers have been coming back in droves as the world economy and business confidence has improved and annual growth in European, US and Asian premium cabins this year is estimated at over 10% (although at times airline traffic and financials in 2009 the rate of decline in some areas was approaching 35%). Intriguingly, premium traffic within Asia has been exhibiting average Regional trends growth of over 20% since December last year. However, even after these increases, total premium traffic volumes appear to be some 7% Orders below the peak levels in 2007 – and in Europe particularly (where busi - ness-class travel has been in decline for many a year as the LCC revolu - tion has developed) still a hefty 25% below the levels in that year. Within this global data however, there are some increasing signs of the disparity in economic performance in differing regions. In the Far East the OAPA reports an average growth in traffic of over 15% since PUBLISHER Y on Y RECENT PREMIUM TRAFFIC TRENDS % change 40 Total Within Int’l Aviation Economics Far East 20 James House, 1st Floor 22/24, Corsham Street 0 London N1 6DR North -20 Within Atlantic Europe Tel: +44 (0)20 7490 5215 -40 Fax: +44 (0)20 7490 5218 Jan June Jan June ‘09 ‘09 ‘10 ‘10 email: [email protected] www.aviationeconomics.com Aviation Strategy Analysis the end of 2009 (and 25% Y on Y % change RECENT REGIONAL TRAFFIC (RPK) TRENDS growth in premium traffic) 30 highlighting that the power - 20 Middle house of China and develop - East Asia/ ing economies in Asia are Pacific 10 ignoring the plight of the Latin America budget deficits of the devel - 0 oped economies. At the same time, carriers in the -10 North Middle East continue to pur - America Europe Aviation Strategy -20 sue their high growth strate - Jan Jan is published 10 times a year by June June ‘09 ‘09 ‘10 ‘10 Aviation Economics gy to develop the Gulf region as competing international hubs. manufacturers to boast a boost to their order Publisher: ATA is the only body to publish timely data books – and gave rise to Airbus comments that Keith McMullan on yields – although the data only relates to a it was doubling its full year forecast of new net [email protected] sample of the top US airlines. As the chart orders. Indeed by the middle of the year the below shows, after the disastrous perfor - two majors had notched up new orders for 530 Contributing Editor: mance of 2009, all route areas operated by the aircraft – equivalent to the total net new orders Nick Moreno [email protected] US carriers selected have shown accelerating achieved in 2009. Boeing used the occasion to improvements in traffic yields – highlighted by publicise its Current Market Outlook in which it Contributing Editor: a near 40% increase in July data on the Pacific uprated average annual traffic growth fore - Heini Nuutinen routes. Of course the yield data is somewhat casts for the next 20 years to over 5% in RPK Production Editor: obscured by the movements in fuel prices terms (upgraded mainly because of the dip in Julian Longin over the past three years and these rates of 2009). Both manufacturers now seem set to [email protected] growth appear high – but Domestic, Atlantic increase production levels – particularly of the and LatAm routes still display average yields 5- 737/A320 industry workhorses – over the next Subscriptions : [email protected] 8% below those achieved in 2008, with only two years to help cover the backlog of orders in the highly marginal Pacific routes showing a this segment. Intriguingly at Farnborough, the Tel: +44 (0)20 7490 5215 recovery in yields to pre-crisis levels. major orders announced were from leasing The airline industry displays various dif - companies – and in particular Steve Udvar- Copyright: ferent cycles of its own – and apart from Hazy's new ILFC look-alike vehicle – hinting that Aviation Economics traffic demand related data one of the more whereas some airlines may not yet have the All rights reserved important is that of the aircraft orders and confidence, the finance professionals believe in delivery cycle; and if we wanted any other the future demand potential (see page 13). Aviation Economics Registered No: 2967706 evidence it is here too that there are distinct There are distinct signs that the economic (England) signs of the upturn. recovery is two-toned; that the performance Farnborough this year allowed the major of the developing economies may well accel - Registered Office: erate the creation of a consumer base James House, 1st Floor Y on Y US YIELDS (cents/RPM) independent of the developed nations 22/24 Corsham St % change London N1 6DR 50 – particularly in Europe and the US - VAT No: 701780947 40 which are likely to be held back by the after effects of the budget deficits fol - ISSN 2041-4021 (Online) 30 Domestic lowing the financial crisis. (IATA indeed 20 The opinions expressed in this publication do is forecasting strong recovery in profit not necessarily reflect the opinions of the edi - 10 tors, publisher or contributors. Every effort is potential this year in all areas except made to ensure that the information con - 0 LatAm tained in this publication is accurate, but no Atlantic Europe). It is almost certain that from legal reponsibility is accepted for any errors -10 now on that the high growth rates will or omissions. -20 Pacific reduce as the year-on-year effects dissi - The contents of this publication, either in -30 pate. It is also possible that the devel - whole or in part, may not be copied, stored or reproduced in any format, printed or elec - -40 oped nations will avoid the dreaded tronic, without the written consent of the Jan July Jan July double-dip recession and the airline publisher. 2009 2009 2010 2010 industry indeed return to profitability. September 2010 2 Aviation Strategy Analysis Leasing market: Rapid adjustment to credit crisis he post-Lehman market has been very difficult joined by private equity investors and others Tfor the leasing industry but the expected fund - looking to enter the industry. New entrants ing gap for new deliveries was not as large or included Sky Holding and Greenstone Aviation, problematical as some analysts feared, thanks to but the biggest new entrant of all is Air Lease (see a number of factors that include extra finance page 13), launched by ILFC founder Steven from the US Export Import Bank, the European Udvar-Hazy, and to which John Plueger and other export credit agencies and the manufacturers ILFC executives have joined. themselves. In addition, the debt and equity mar - Greater long-term challenges to existing kets were not as depressed as many had feared. lessors may come from new, Chinese leasing enti - In fact, Steve Hannahs, chief executive of ties. In a recent speech Wang Changshun, vice Aviation Capital Group, says the impact of the minister of the Civil Aviation Administration of downturn has been “very minor”, as while lease China (CAAC), said that by 2025 China will require rates have dropped by up to 25% over the last 18 a fleet of 3,000 civil aircraft, of which around 60% months, the fall in interest rates has enabled will likely be leased. While this is encouraging yield to remain stable. AWAS too says 2009 was, many Western lessors to beef up their presence financially at least, its best ever year, and it had in the country, Chinese government policy will few repossession or credit problems. But these inevitably favour home-grown lessors, and a flur - lessors, along with the ever-expanding BOC ry of new companies backed by Chinese banks Aviation had one thing some others lessors didn’t and industrial conglomerates is likely to emerge – financially stable owners/parents.