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MANUFACTURERS AND AIRLINES BRACE FOR ECONOMIC SLOWDOWN

By Volker K. Thomalla

The spectre of a global recession has turned into a reality which is causing panic in the airline industry. First the major US airlines endured a battering of both sales and profits in the first quarter of the year, and then there was still worse to come in May, which turned out to be the worst May for 20 years.

As the economic downturn is proving more pronounced in the USA than in Europe, the US airlines have suffered the most, but the European airlines cannot distance themselves entirely from the turn that events are taking, as air transport is too globally organised. The gap between costs and revenue is widening once again: on the one hand fuel prices are rising, and fuel constitutes a major cost factor for the airlines, while on the other hand the well-paying Business Class passengers are flying less or even staying at home due to the slowdown of the economy. The airline industry is an early warning indicator of business trends.

Will we see 1,000 passenger aircraft parked in the deserts of Arizona as we did in 1990? I believe not. Unlike 1990, when sales collapsed very suddenly, triggered by the Gulf War, this time the aircraft manufacturers are prepared for the recession.

The economy is dynamic. Upturns are always followed at some point by stagnation. This fact has been planned into the manufacturers' plans, and in fact they had expected a drop in orders to occur last year. Moreover, today there is a more urgent replacement need than there was eleven years ago. Old aircraft, in some cases planes which do not comply with the Chapter III noise standards, will have to be taken out of service as they will become too expensive to operate. However, given that traffic levels are not actually declining but, at worst, stagnant, new aircraft will have to be procured to replace the old ones, whether in the form of purchases or leased aircraft. And there are more than enough older aircraft. They will soon be reaching the end of their economic life and have to be scrapped.

Competition amongst the airlines and the cost pressure under which they operate will ensure that aircraft continue to be purchased. Only airlines that service their routes with modern and attractive aircraft stand a chance in the tough competitive struggle to win the full fare-paying passengers.

Cost-conscious airlines prefer modern, new aircraft with low fuel consumption to ones which run up high costs due to high fuel consumption and outdated technology.

Leasing companies make it easier for the airlines to modernise their fleets and adapt their mix of aircraft flexibly to the market requirements. The high proportion of orders which leasing companies account for these days is a testimony to this. During the Paris Air Show in June, for example, Airbus Industrie received an order from ILFC for 111 aircraft worth $8.7 billion, the biggest single order Airbus has received since it was founded 30 years ago.

It would seem that the aircraft manufacturers have come down from the economic heights of the year 2000 to a soft landing this time, but that does not mean that they will not have to accept the odd bruise here or there.

From page 4 of FLUG REVUE 8/2001