Airline Weekly - January 2, 2012

Cover Story

The Cautious and the Restless: Network and capacity trends for 2012. Who’s growing, who’s slowing and who’s flying where

So much for expectations. When airlines were flying high in 2007—their demand strong, their fleets growing, their profits rising—little did they know just how bad things would get the following year: oil prices near $150 a barrel, a global economic meltdown and weak demand that grew weaker still into 2009, one of the worst years ever for airlines, for those that weren’t low-cost carriers anyway. And then, just as unexpectedly, the tide reversed, and 2010 morphed into one of the industry’s best years ever—better than even 2007.

Last year, alas, proved less dramatic, with industry profits down from 2010 but above breakeven nonetheless. Which brings us to 2012—what will this year bring, and how are airlines preparing for it?

The answer to the latter part of that question is visible in the industry’s unmistakably conservative approach to 2012 capacity expansion, demonstrated by another year of planned non-growth in the U.S., by recent capacity cutbacks at Europe’s Big Three, by cooled ambitions in Brazil and by major downsizing at carriers like Air Berlin, Kingfisher and Malaysia Airlines. Overall, IATA expects worldwide ASK capacity to grow just 3% at most this year, down from 6% in 2011. In its worst-case scenario, which assumes a major economic crisis in the eurozone, IATA sees ASKs not growing at all this year.

Aside from fears of a eurozone crisis, airlines also worry about a potential economic slowdown in China, another year of sluggish growth in the U.S. and the adverse impact these developments would undoubtedly have on all markets in all regions. At the same time, airlines have dampened their enthusiasm for expansion due to higher taxes and government charges, most notably in Europe but also in India and elsewhere, as well as expectations of another year of expensive fuel. Their anti-growth bias also stems from recent mergers, joint ventures and alliances, which have softened competitive pressures to expand just for the sake of protecting market share. Consolidation also presents more opportunities for airlines to squeeze yields by constraining capacity, thanks to the greater number of markets they and their partners now dominate.

For all the pessimism, however, there are certainly pockets of growth, starting—no surprise—with the Arabian Gulf. Already, Emirates has seven new cities ready for launch in 2012, namely Rio de Janeiro, Buenos Aires, Dublin, Lusaka, Harare, Seattle and Dallas-Fort Worth. That still doesn’t top the nine new cities announced by Qatar Airways: Perth, Helsinki, Zagreb, Gassim, Zanzibar, Kigali and Mombasa. And that’s after Qatar added 15 new cities in 2011. As for Etihad, the third and smallest member of the Gulf’s Big Three, it has so far announced just one new market for 2012 (Shanghai) but added Chengdu and Dusseldorf to its route map and bought 30% of Air Berlin—all in the past month. According to the latest tables published by Boeing and Airbus, the Gulf’s Big Three together have 114 B777s, 61 B787s, 92 A380s and 175 A350s on order, a sure sign of a lot more growth to come.

And why not? High energy prices continue to lure enormous sums of money into a region still replete with low-hanging fruit—namely, traffic flown by smallish... (547 of 2,189 words)

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The new year is upon us, but not before a flurry of airline activity in the final weeks of 2011. BA/Iberia won a takeover bid for British Midland but suffered pilot strikes in Spain. Etihad bought a large stake in Air Berlin. Southwest placed a huge B737-MAX order. All Nippon announced new B787 routes. And the industry saw continued fervor for alliances and partnerships.

The U.S. airline market, still by far the world’s largest, begins the new year with cautious optimism. For Delta and United, unit revenues remain strong, again thanks to capacity cuts but also to signs of an improving economy. Even American is hopeful, now that it’s taken the difficult step to restructure in bankruptcy. The side effects are unpleasant, but this is an airline that clearly needed some strong medicine.

Is there medicine strong enough to help Virgin America? It’s certainly not well, judging from its Q3 financial report, though it did receive a life-prolonging injection of cash. That’s different, however, from a cure.

There is, of course, one miracle cure for all that ails the airline business: a drop in fuel prices. But oil prices went up in 2011 and begin the new year near $100 a barrel. There’s also that uncomfortable Catch-22 whereby oil prices seem to fall only when economies stumble. And that’s no good thing for airlines, unless perhaps you’re an LCC.

The start of the new year also means another round of airline financial reports right around the corner. Southwest, for example, reports Q4 results Jan. 19.

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