Optimism premature, CAPA warns airlines

To guide the aviation industry through the stormy financial year ahead, the Centre for Asia Pacific Aviation (CAPA) has prepared a risk assessment guide, which factors in variables that are often ignored by the industry. At present, says CAPA, the preoccupation with fuel prices is masking the importance of other key variables.

The guide considers the impact of both fuel prices and of a fluctuating US dollar; excess capacity and the need for network airlines to downsize; and prospects for airline consideration.

It says most airlines will report losses in 2009, even in the US, where the more optimistic forecasts appear. In view of the tight credit conditions coupled with a substantial reduction in aircraft values, some unexpected collapses - or rescue packages - are likely.

The picture is likely to get worse before it gets better, and an extreme risk aversion is the recommended strategy.

Many airlines' share prices are plumbing sustained depths not seen for years, and may not necessarily go up again, although some speculators may bet short-term on this. But in fact, no one has a real handle on what will happen with the volatile cost, supply and demand items, says the CAPA guide. For example, if fuel prices double from current levels in today's environment, airline share prices will dive.

In short, the big issues for the 2009 financial outlook may lie much deeper than a review of likely profitability. In 2009, the aviation industry's performance will depend as always on the cost and supply-demand fundamentals - each of which will be highly unpredictable.

It says as the aviation industry's situation is unprecedented, history has no platform off which to project what will happen in the year ahead. The normally useful forward indicator, air freight behaviour, has begun to fall off the scale in recent months, suggesting an unusual future at best.

Naturally, airlines with strong balance sheets offer better prospects than their debt-ridden counterparts. However, if all airlines are losing money, it becomes a matter of how much longer than the others they can hold out.

Of the three key inputs, cost, demand and supply, the first two currently show favourable signs: fuel costs are massively down from the soaring prices in 2008 and airlines have begun to reduce supply (seat capacity). On the basis of this, some analysts, especially in the US - where network airline share prices plummeted in 2008 - are predicting a more favourable outlook for 2009.

However, the third input, demand, is wholly unpredictable - a vital indicator which should be sufficient to make forecasters wary of predicting a financial upside. Today, it is also the quality of demand that is of concern. Even after the dotcom bubble burst in 2000, the degree of attrition of premium traffic did not occur at today's levels.

Further, despite positive signs for costs and capacity, there can be no guarantee of their consistency. Many producers see an oil price around $70 as being a necessary level and OPEC may well continue to reduce output to achieve this. Also, the airline industry's propensity for self-destruction means that capacity reductions previously announced because of high fuel prices are now being reconsidered.