Business confidence index

IATA’s quarterly business confidence survey of airline Chief Financial Officers provides an invaluable forward-looking view of key financial and demand indicators. It is similar to confidence surveys that are conducted for the manufacturing and service sectors in several major economies.

The April 2008 survey shows:

• Airline business confidence in current and future profitability weakened sharply in Q1 2008. For the first time since our survey began in March 2005, expectations of changes in profitability were, on average, negative. Half of the respondents thought that profitability had decreased in Q1, while over 61% expected profitability to deteriorate further over the next 12 months. High and rising fuel prices remain a major concern, but the other half of a damaging “stagflation” scenario, i.e. weaker demand, is also cited as a major worry for profitability.
• The April 2008 responses strongly reflect the more challenging economic environment encountered by airlines in recent months. Further expansion in developing markets (e.g. Asia), through new capacity and new routes, continues to provide a boost to demand, though this is increasingly offset by a slowdown in the US economy and by increased competition on many routes.
• Oil and fuel prices reached new record highs in Q1 2008. There is little expectation of any major relief in terms of a fall in the oil price in the next 12 months. Financial hedging and (for non-US airlines) a depreciation of the US dollar can help to offset (at least temporarily) some of the higher costs, but most of the upward cost pressure is beyond the control of airlines. Half the respondents were able to pass on some of the higher costs to passengers through higher yields in Q1. But as the demand environment slows and new capacity deliveries add to competition, any pricing power is expected to weaken over the next 12 months.