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Aviation Strategy Issue No: 160 Jan/Feb 2011 Financial recovery - up in the air? CONTENTS Analysis his time last year we were looking at the potential of recovery Tin 2010 in the hope of an emergence from the worst recession Global economic outlook for a generation: the IMF was projecting global economic growth and aviation implications 1-3 of 4% (and 2.5% in the developed world); IATA predicting a 5% increase in airline traffic but worldwide losses of $5.6bn. In the Virgin Atlantic: event, the bounce back has as usual (and as expected) been far Strategic reviewing 4-7 stronger than anticipated – at least in most areas. It now looks as if world GDP may have grown by 5% in 2010, Virgin America: with a near 3% growth in the advanced economies; the airline Bold growth move 7-8 industry has seen total passenger traffic up by some 6% and freight traffic up by 18% and, with continued restraint on capac - Briefing ity (up by a possible 3% overall), been able to achieve significant improvements in yields – almost back to pre-crisis levels; for Air Astana: December 2010, ATA figures suggest that domestic yields had Kazakhstan’s dynamic airline 8-11 finally risen above the 2008 levels. Of course, these growth fig - ures would have been even higher for the full year had European Southwest Airlines: airspace not been closed for a week following the eruption of Return to growth mode 12-17 Eyjafjallajökull in April last year. IATA is now predicting in its December financial forecast that total airline traffic (in RTK) will Airbus and Boeing orders in 2010 18-19 $bn LONG TERM GLOBAL INDUSTRY FINANCIALS $bn 30 600 Databases 20-23 25 European, US and Asian Operating 550 airline traffic and financials 20 profits 500 Regional trends 15 Orders 450 10 Net profits 5 400 PUBLISHER 0 350 -5 Aviation Economics 300 -10 James House, 1st Floor 22/24, Corsham Street Revenues 250 London N1 6DR -15 (rhs) Tel: +44 (0)20 7490 5215 -20 200 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010F Fax: +44 (0)20 7490 5218 Source: ICAO / IATA email: [email protected] www.aviationeconomics.com Aviation Strategy Analysis have grown by 12% in 2010 (against a 6% economies. It quotes as a central forecast growth in capacity) with a 5% hike in over - its assumption of $90/bbl fuel price – while all yields producing an annual growth in current spot prices once again have revenues of 17% to some $565bn – the exceeded the $110 level. same level of global airline revenues Meanwhile, it suggests that financial achieved in 2008. At the same time it is co nditions may be expected to improve now expecting operating profits for 2010 with a further gradual easing of lending of nearly $30bn (a margin of 5.5%, similar conditions – even though it expects that to previous peaks of the cycle) and net financial stress will remain elevated in the profits of $15bn. peripheral Euro-zone where market partic - Aviation Strategy Although we have seen this strong ipants remain concerned about sovereign is published 10 times a year by Aviation Economics rebound in 2010, there remain many and banking risk. Of more concern is evi - doubts in the immediate potential for the dence of early overheating in some Publisher: world's economies and airlines' fortunes. economies; rapid growth in emerging and Keith McMullan In many ways the economic recovery has developing economies has narrowed or in [email protected] been and remains two-speed. The develop - some cases closed output gaps, with resul - ing nations have been racing ahead – with tant severe pressures on inflation – with Contributing Editor: both China and India immune from the inflation forecasts for these countries Nick Moreno [email protected] global recession and registering some 10% averaging 6%. In the developed world in GDP growth in 2010. ASEAN and Brazil contrast, with continued economic “slack” Contributing Editor: grew by 7%, and Russia by 4.5%. The IMF and “well-anchored” inflation expecta - Heini Nuutinen continues to project Chinese growth of tions should keep inflation low at around Production Editor: 9.5% a year for the next two years; and the 1-2% level. This should in all fairness Julian Longin that for India and Brazil of 8% and 4% lead to much needed forex balancing – but [email protected] respectively. Among the developed world in the absence of some exchange rate the US, Canada, Germany and Japan have floats could perhaps lead to increased Subscriptions : [email protected] not done too badly with growth of 2-4%; trade tensions. but other major developed nations have As with all economic forecasts the IMF Tel: +44 (0)20 7490 5215 had very lacklustre performance – with the adds caveats. There are downside risks: the UK, France and Italy showing growth of pressures in the periphery of Europe could Copyright: only 1% at best. spread back to the centre and dissolve the Aviation Economics At the same time the IMF has upgraded Euro pact; inflationary pressures on the All rights reserved its global forecasts marginally for 2011. developing nations could create a tradi - Citing fiscal packages in the US and Japan, tional boom and bust. On the other hand Aviation Economics Registered No: 2967706 stronger than expected private consump - there may be upside potential; investment (England) tion in Germany, and lauding policy reac - within the developed economies could tions in the Euro-zone in response to the rebound. Reading between the lines the Registered Office: crises in Greece and Ireland, the institution IMF seems to consider that the downside James House, 1st Floor is now looking to a growth in the devel - risk may outweigh the upside – with partic - 22/24 Corsham St London N1 6DR oped nations of an almost “normal” 2.5% - ular concern that financial institutions VAT No: 701780947 while emphasising that this is a dismal would tighten credit conditions even fur - level of recovery from the recessionary ther and provide an additional halt to glob - ISSN 2041-4021 (Online) period and hardly sufficient to counter the al economic performance. The opinions expressed in this publication do rise in unemployment resulting from the not necessarily reflect the opinions of the edi - tors, publisher or contributors. Every effort is recession. Equally it notes worrying infla - made to ensure that the information con - Aircraft order cycle tained in this publication is accurate, but no tionary pressures not least of all in the legal reponsibility is accepted for any errors developing nations, notably commodity - Meanwhile the aircraft order cycle also or omissions. and especially fuel and food – prices; it saw a strong improvement last year. There The contents of this publication, either in envisages further upside risk to basic com - appear to have been a total 1,600 net new whole or in part, may not be copied, stored or reproduced in any format, printed or elec - modity prices as a consequence of the jet orders up from the nadir of 785 in 2009, tronic, without the written consent of the publisher. poor harvests at the end of 2010 let alone while new jet aircraft deliveries have been the strength of the developing nations' steady at around 1,110 units – or a fairly Jan/Feb 2011 2 Aviation Strategy Analysis normal 5% of the fleet. The order backlog IMF ECONOMIC PROJECTIONS (% change, year-on-year) meanwhile has expanded to over 8,000 air - craft (exceeding even the 2008 peak) 2008 2009 2010 2011 2012 GDP equivalent -- despite recent increases in World Output 3.0 -0.6 5.0 4.4 4.5 production rates -- to 7.5 years. Ed Advanced economies 0.5 -3.4 3.0 2.5 2.5 Greenslet, in his latest forecast update in United States 0.4 -2.6 2.8 3.0 2.7 January, is suggesting that 2010 saw the Euro area 0.6 -4.1 1.8 1.5 1.7 Japan -1.2 -6.3 4.3 1.6 1.8 peak of aircraft surplus to supply require - United Kingdom 0.5 -4.9 1.7 2.0 2.3 ments at nearly 14% of the world invento - Canada 0.4 -2.5 2.9 2.3 2.7 ry (its highest ever peak) and that with a Other advanced economies 1.7 -1.2 5.6 3.8 3.7 forecast of 5.5%-7.5% growth in traffic and Newly industrialised Asian economies 1.7 -0.9 8.2 4.7 4.3 capacity over the next few years even the Emerging and developing economies 6.1 2.6 7.1 6.5 6.5 BRIC build up in anticipated production and Russia 5.6 -7.9 3.7 4.5 4.4 deliveries (perhaps towards 1,500 units a China 9.6 9.2 10.3 9.6 9.5 year) over the period will be absorbed India 7.3 5.7 9.7 8.4 8.0 allowing the supply/demand balance – at Brazil 5.1 -0.6 7.5 4.5 4.1 least globally - possibly to continue to World trade volume (goods/services) 2.8 -10.7 12.0 7.1 6.8 improve further. All other things being equal, a reason - pricing environment to hope for sustained ably positive forecast of GDP growth improved returns. should be reasonably positive for air trans - Echoing IMF comments, IATA sees the port; but the recovery here too may be European region as being in the weakest somewhat two-speed. While traffic perfor - position in the medium term – with some mance in the Far East is pulsating, there major countries reining back on stimulus still appears to be a long way to go before packages to implement more austere finan - the levels of global premium traffic return cial plans - even those who have not been to the previous peaks – in the latest figures forced to.