Welcome to the latest edition of IATA’s quarterly eAnalyst.
The eAnalyst is designed to provide a concise and insightful guide to the current key issues in the global airline industry.
In this issue we discuss the more challenging operating environment faced by airlines in the first quarter of 2008. Demand growth is affected by a weaker US economy and the impact of the credit crunch, but jet fuel prices continue to rise to new record levels. For the first time since our survey began in 2005, airline expectations of changes in current and future profitability are, on average, negative.
Given the current pressures, it is important to understand the sensitivity of airline demand to changes in prices and income. We present new research that provides robust and reliable estimates of the sensitivity of demand applicable to a wide range of air transport markets.
In response to the economic challenges, airlines can potentially seek to expand markets and improve efficiency through consolidation and/or liberalisation. Consolidation often requires the approval of the competition authorities but, as our discussed in our Analyst Viewpoint section, these authorities often use a flawed approach in their assessment. Instead, they must adopt a broader and more accurate approach. Liberalisation remains a long-term goal. Our Key Policy Issue section discusses the move towards the second stage in US / EU negotiations and the challenges that are still to be faced.
I hope you find it to be an interesting and informative read.
Brian Pearce
IATA Chief Economist
INDUSTRY PERFORMANCE AND OUTLOOK
Stagflation threatens the outlook
The economic uncertainties facing the aviation industry have significantly increased. A further sharp rise in oil prices and a deterioration in the US economy have increased the risk of a damaging combination of rising costs and slowing demand. IATA has taken a conservative approach in cutting its industry profit forecast for 2008 from $5 billion to $4.5 billion. The risks to this forecast are concentrated on the downside.
Airline business confidence levels turn negative
IATA’s April 2008 survey shows a sharp weakening in airline business confidence. For the first time since our survey began in 2005, expectations of changes in current and future profitability are, on average, negative. High and rising fuel prices remain a major concern, but the other half of a damaging “stagflation” scenario, i.e. weaker demand, is also strongly reflected in the survey responses. Weaker demand and increased competition from new capacity are expected to reduce the ability of airlines to offset the impact of higher fuel prices through increased volumes or higher yields.
ANALYST VIEWPOINT
The competition effects of airline mergers and alliances
by Mike Tretheway, InterVISTAS Consulting Inc
The analysis of the potential competition effects of an airline merger or alliance often focuses on the change in average fare prices. However, this approach is fundamentally flawed. It should be broadened to cover the impact on economic efficiency. The pricing structure of an airline is not uniform; instead different customers are charged different prices. As such, a merger that introduces higher value new services may increase the overall average fare, but at no cost to existing passengers. In addition, removing loss-making routes can also raise average fares, but increase overall efficiency and sustainability.
RESEARCH TOPIC
Air travel demand
InterVISTAS Consulting Inc., on behalf of IATA, has undertaken new research into the sensitivity of air travel demand to changes in prices and incomes. The research uses new econometric analysis and a review of previous studies to estimate air travel demand elasticities applicable to a wide range of air transport markets. The study found that at the route level (where competition between airlines or city-pair markets is high) the sensitivity of demand to price is very high. However, at the national or regional level, air travel is relatively price insensitive. Air transport policy decisions run the risk of being ineffective, or even counter-productive, if the correct demand elasticity is not used.
KEY POLICY ISSUE
US / EU open skies negotiations: the second stage begins
by Professor Brian F. Havel, De Paul University College of Law
The US / EU “Open Skies” Air Transport Agreement – that went into provisional effect on 30th March 2008 – is in reality more of a staging-post on the journey to a truly open transatlantic aviation marketplace. The issue of foreign investment and control of airlines remains at the heart of the second stage negotiations, but faces clear and present political opposition. If “Open Skies” is successful it could be enhanced and extended to other regions of the globe. For now, however, the negotiators must address the formidable challenges of the second stage.
DATA UPDATE
Custom analysis and statistical services
Leave the data compilation up to us. IATA statistical services gives you more time to analyse results and trends. We provide customised analysis and build individually tailored reports to meet your unique requirements for monitoring trends, identifying market opportunities or benchmarking. Our wealth of information allows us to prepare custom reports for Governments, International Organizations, consultancy firms, financial institutions and others.