by Chris Tarry, Aviation Industry Research and Analysis (CTAIRA)
Given the current economic climate, many airlines are again facing the need for ‘survival mode’ operations in order to remain in business. Chris Tarry looks at the key considerations facing airline managements looking to develop coherent strategy in these circumstances – much of which will rely on conserving sufficient cash.
- Airlines continue to face very challenging market conditions: In the near term traffic and revenue appear to be continuing to fall in most markets and at the time of writing, the oil price is again comfortably over $60 a barrel. There is increasing support for the view that the current economic downturn may have a “W” shape with the second dip starting as we move into 2010.
- International traffic is now trending around the levels last seen in 2004/05 but capacity available within the industry and the infrastructure/overhead supporting it is still close to the levels of activity forecast in 2007/8 for 2009. This is not only reasonably scary in its own right but given that the consequences of excess capacity are all too clear on fares, revenues and cash, the prospect is one where even fewer airlines will be able to generate an adequate, let alone particularly attractive return in the next upswing.
- The current and likely future environment highlights the need for both an operational plan as well as a coherent and credible strategy as well as the all important financial plan – hanging on for the increasingly bumpy ride from an operational perspective and more of the same as a strategy are no longer appropriate.
- From a financial perspective perhaps the only thing that matters now is cash, and in this respect to have as much as possible; for all airlines the need is to minimise the outflow as well as in many, if not most, cases to seek new sources.
- In the current circumstances the fundamental question is perhaps “how much cash is enough?” – There is unfortunately no straightforward answer other than “as much as possible”. The airline business has never been easy and although those which are able to attract new money will at least have a cushion, it looks as if the operating environment will get more difficult yet.
- For those that need to access new sources of cash, the window is clearly open but if expectations of a “W” shaped downturn increase it may not remain open for long.