Airlines braced for slump

EXECUTIVES from British Airways and other airlines gathering in Singapore for Asian Aerospace '98, the biennial air show that begins tomorrow, will probably put on a brave face about their profit outlook. But the signs of a deeper-than-expected decline for Western airlines are emerging daily.

The Asian turmoil has triggered a crisis for the industry that is spreading quickly, and as airlines slash Asian services, they are using the extra aircraft to flood routes in the West. BA recently cut flights to South Korea and Sri Lanka in favour of adding capacity in other markets, including a 15 per cent boost on North Atlantic routes this summer. Other airlines will match the move, forcing a price-cutting war.

"The Asian 'flu is more contagious than people want to believe," said Chris Avery, an analyst with Paribas Capital Markets. "Even with the tremendous strength in the West right now, overcapacity in Asia will seep into the rest of the market, bringing everyone down."

Now a growing number of analysts say the Asian crisis will push down profits at Western airlines as soon as this year, spurring another lengthy slump in the notoriously boom-and-bust air transport industry.

Philippine Airlines said on Friday that it will delay nine deliveries of planes from Boeing and Airbus Industries, cut flights and slash its payroll in a bid to cut expenses by 40 per cent.

Qantas Airways, which has already cut Asian flights and seen its shares drop 28 per cent in five months, warned this week that the Asian crisis will hurt its earnings in the second half, after first-half profit rose 9.4 per cent.

For investors, the message is clear: now is the time to sell airline stocks. Avery and other analysts said airlines' profits may have peaked, after a three-year rebound from a disastrous slump that saw them lose $18bn (pounds 10.6bn) between 1990 and 1994.

While profits may still be good this year, "they will inevitably head toward zero as we get into the downturn," said Chris Partridge, aerospace banker with Deutsche Morgan Grenfell.

The gloomy forecasts mark a sudden turnaround from last year, when industry executives and some analysts were speaking of a "golden age" that would prevent a deep slump this time.

International alliances, they said, would keep capacity down as airlines team up on some of the routes and use only one plane instead of two. Deregulation would force airlines to stay

nimble. And, most importantly, many analysts said the industry had learned its lesson after the last slump and had bought planes more wisely.

That doesn't appear to be the case. After ordering too many planes they couldn't pay for after their national currencies tumbled against the dollar, Asian carriers from Garuda Indonesia to Korea's Asiana Airlines have deferred orders.

Boeing publicly maintains that it won't lose orders and expects to delay only about 60 deliveries in the next three years, primarily for the $150m Jumbo jetliners that bring in its best profit margins.

Industry watchers say Boeing privately admits its forecasts are optimistic. "Underneath their cloaks they are already talking about capping and even reducing output," Mr Partridge said.

Avery, the Paribas analyst, was forecasting in 1996 that deliveries of large commercial jets would keep rising steadily until at least 2000. Now he expects the peak to come in 1999, as deliveries surge to 823 before falling to 785 the following year, marking the start of the tailspin.

The manufacturers, for their part, are still clinging to a vision of steadily growing deliveries well past the turn of the century. British Aerospace forecast this week that deliveries by Airbus, in which it holds a stake, will hit 300 planes in 1999 and stay at that level for at least another three years. Airbus delivered 182 planes last year.

"In a difficult situation, you may see the loss of some orders," conceded Mike Turner, the head of BAe's civil aircraft wing. But he added: "I don't see a steep recession this time."

That, analysts and industry executives agree, is the one consolation. The early 1990s slump was accentuated by the Gulf War, which pushed up fuel prices. The slowdown this time may be more like the early 1980s, when total airlines losses were more like $1bn annually.

That is scant comfort for investors in airlines, which typically make a return on sales of only 3 per cent even in the good times, according to International Civil Aviation Organisation figures. Declining profits would also cost jobs at Boeing and Airbus, which typically lay off thousands once orders fall.

"It is undoubtedly true that we are going to see a huge level of jobs go, very reminiscent of the last downturn," Mr Partridge said. "The soft landing is the key - if it can be maintained, then it won't be nearly as disastrous as the early 1990s."

Copyright: IOS & Bloomberg

Start your day with The Independent, sign up for daily news emails
A boy holds a chick during the Russian National Agricultural Exhibition Golden Autumn 2014 in Moscow on October 9, 2014.
Life and Style
love + sex
Arts and Entertainment
Victoria Wood, Kayvan Novak, Alexa Chung, Chris Moyles
tvReview: No soggy bottoms, but plenty of other baking disasters on The Great Comic Relief Bake Off
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle 0 Man United 1: Last minute strike seals precious victory
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
Arts and Entertainment
Seth Rogan is one of America’s most famous pot smokers
filmAmy Pascal resigned after her personal emails were leaked following a cyber-attack sparked by the actor's film The Interview
Benjamin Netanyahu and his cartoon bomb – the Israeli PM shows his ‘evidence’
ebooksA special investigation by Andy McSmith
Arts and Entertainment
80s trailblazer: comedian Tracey Ullman
Life and Style
A statue of the Flemish geographer Gerard Kremer, Geradus Mercator (1512 - 1594) which was unveiled at the Geographical Congree at Anvers. He was the first person to use the word atlas to describe a book of maps.
techThe 16th century cartographer created the atlas
Arts and Entertainment
Stephen Tompkinson is back as DCI Banks
tvReview: Episode one of the new series played it safe, but at least this drama has a winning formula
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

What is it like to live with Alzheimer's?

Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
The Internet of Things: Meet the British salesman who gave real-world items a virtual life

Setting in motion the Internet of Things

British salesman Kevin Ashton gave real-world items a virtual life
Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

Election 2015: A dead heat between Mr Bean and Dick Dastardly!

Lord Ashcroft reveals latest polling – and which character voters associate with each leader
Audiences queue up for 'true stories told live' as cult competition The Moth goes global

Cult competition The Moth goes global

The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

Pakistani women come out fighting

Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
Leonora Carrington transcended her stolid background to become an avant garde star

Surreal deal: Leonora Carrington

The artist transcended her stolid background to become an avant garde star
LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

Education: LGBT History Month

Pupils have been discussing topics from Sappho to same-sex marriage
11 best gel eyeliners

Go bold this season: 11 best gel eyeliners

Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

Cricket World Cup runs riot to make the event more hit than miss...

The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

Katarina Johnson-Thompson: Ready to jump at first major title

After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot