ANALYSIS: Constraints to adjustment and the consequences

The industry may well have experienced a structural fall in revenues as a result of this downturn. Chris Tarry reminds that such a fall necessitates a resizing in the productive capacity of the industry if investable returns are to be made. The industry faces a number of constraints on this adjustment process.

Despite the announcement by many airlines of cost reduction programmes, fuel is the major swing factor on the cost side of the equation and at the time of writing the price was back to levels last seen a year ago but this time it is on the way up and twelve months ago the trend was down. For most airlines their ability to reduce unit costs is a function of growth which enables costs to be “grown down” as fixed costs are spread over more ASKs and ATKs.

New aircraft may well be received by airlines that can grow structurally but as the result of taking traffic from competitors. The near and medium term effect will be less revenue to share around and this will persist until there is at least a partial withdrawal, and even then the capacity is likely to remain somewhere in the system.

An inevitable part of the adjustment to a downturn is an increase in the number of parked aircraft and unsurprisingly, compared with our reference point of September 2007, the number of aircraft defined by Ascend as parked has risen by some 750 aircraft to just over 2600 in September 2009.

Less visible to the outside observer has been the change in daily utilisation. Looking at data which measures change in hours used per day for aircraft in airline service it appears that there has been a fall of some 4.5% for short haul aircraft and some 5.5% for long haul. This will put upward pressure on unit costs.

The re-entry of existing capacity too soon is only one area of concern on the capacity side of the equation. The most recent statements from the manufacturers suggest that for the time being at least they intend to maintain production rates in the single aisle segment at or close to current rates.

The risk remains that the adjustment in the productive capacity of the industry that would appear to be necessary will be largely absent due to the supply of new aircraft into the system. This suggests that even fewer airlines will be able to achieve investable returns in the next upswing.

Source: Chris Tarry, CTAIRA