The Hindu Business Line : Back in the red

An abiding mystery of economics is why people invest in volatile businesses with very variable or even, in the long run, non-existent profits. Sports clubs are one example. Airlines, whose decadal rate of return has never exceeded 1.5 per cent, are another.

After a five-year boom, airlines have gone into another financial tailspin and, unlike the post 9/11 period in 2000, this time the suffering and pain for passengers, airlines and aircraft manufacturers could be prolonged.

There are enough pointers to bad times ahead. The recession in various parts of the globe, including the US and Europe, is also impacting the industry. IATA estimates that this year there has been an even greater decline in passenger load factors as recession-hit traffic fell faster than airlines were able to cut capacity.

The latest Airlines Financial Health Monitor, released by the Geneva-based International Air Transport Association (IATA) says that the number of aircraft parked in the desert has seen a dramatic increase. It has gone up from a monthly average of a mere six last year to almost 200 in September and October this year. There has also been a slowdown in the number of new aircraft being delivered in September this year, at around 78.

Slower orders

Several international airlines are either returning, cancelling or delaying deliveries of aircraft. The UK-based BMI has indicated that it will not order the five A-330s for which it received approval, while US-based Continental Airlines has indicated that it will take delivery of two Boeing 777s in 2010 instead of in 2009 while 16 Boeing 737 aircraft slated to be delivered in 2009-10 have been deferred to 2011.

In India both Kingfisher Airlines and Jet Airways are doing the same. Kingfisher has negotiated with Airbus to defer orders for 32 A-320 family aircraft from 2008-09 to 2010-12, apart from selling two of the five Airbus A-340 aircraft. Jet Airways has also announced that it will be postponing aircraft deliveries by at least a year and has decided not to replace any of the phased out aircraft. The airline has, however, not cancelled any of the aircraft on order.

Continental Airlines Chairman and CEO Larry Kellner called the delayed deliveries “prudent moves in uncertain times” and said the carrier is hunkering down for a difficult period. “We know that demand for air travel will be adversely affected by the recession,” he told analysts and reporters at Air Transport World.

The global decline in the price of fuel and the resultant decline in aviation turbine fuel prices which, in normal times, would have been a big relief to the industry, is actually causing more heartburn. While jet fuel prices have fallen back to 2005-06 levels of around $70 a barrel from $180 a barrel peak in July this year, the actual price being paid by most airline is higher because of the hedges taken out earlier this year.

Crisis may be protracted

Investors are also expecting the industry’s financial performance to deteriorate more than the average in other sectors as globally airline stocks are down 60 per cent from the end-2007 peak, compared to a 40 per cent decline in other sectors. In such a scenario it is hardly surprising that the industry is likely to report a loss which, some estimate, could cross $5 billion.

Many had seen the writing on the wall. Addressing the IATA AGM in June this year, the CEO, Mr Giovanni Bisignani said that 24 airlines went bust in the past few months. Since that speech the list has been expanding, with Italian national carrier Alitalia also filing for bankruptcy.

The silver lining in this time of gloom may be provided by India, China and few other developing economies. With the European continent and America slipping into recession, the lower than anticipated growth rate in both India and China will probably be a breather for the global industry.

Probably the last word in this debate should go to the Chairman of British Airways, Mr Willie Walsh, who is quoted on the Flight International magazine Website as describing the outlook for the industry as a crisis that will be “deep and protracted.” How long it will last is anybody guess.