David Prosser: No reason to expect a soft landing

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The Independent Online

Outlook Iata's claim yesterday that an air traffic recovery may have begun will no doubt be welcomed by the global airline industry, but there was precious little evidence of any turnaround in the results of Aer Lingus, which were published almost simultaneously. Or, for that matter, in the downbeat demeanour of British Airways boss Willie Walsh in the interview he gave this paper earlier this week.

What seems clear is that the airlines are paying through the nose to arrest what decline in passenger numbers there has been. Traffic was down 2.9 per cent last month, compared to the 6.8 per cent fall seen over the first seven months of the year alone, but that is unlikely to have had a positive effect on revenues. The International Air Transport Authority conceded that these are still falling, with yields declining at an unprecedented rate.

In simple terms, to persuade people to get on their planes, airlines are having to slash fares – by around 40 per cent in the lucrative business class sector, which is so crucial to the long-haul airlines.

At Aer Lingus, running through cash at such a pace that it can no longer rely on banks to support future aircraft orders, fares have fallen 17 per cent so far this year – and they are still falling. The ongoing price reductions are "significant", says the airline's chairman.

Last year, in the face of record oil prices, the global airline industry combined lost $8.5bn. This year, despite a far more benign environment for fuel costs, the figure is likely to top $9bn, Iata reckons. The losses might be even greater if, as now seems likely given Opec's hopes of further increases thanks to curbs on production, oil prices pick up during the second half of the year.

Are there any reasons at all to be optimistic? Well, it's worth pointing out that on a seasonally adjusted basis, those passenger numbers for July actually translate into a 3 per cent increase. On the same basis, freight – which was down by 11.3 per cent in July compared to the same month last year – is also back in positive territory.

Air freight is a keenly watched indicator of global economic health, reflecting as it does volumes of world trade. It's not just that air freight volumes decline in line with shrinking trade but also that people switch to shipping by sea when money is tight. So air freight declines are predictive of a downturn, while improvements can herald an economic recovery.

The likes of Aer Lingus, however, won't be holding their breath. For as long as they have to continue cutting fares to get business – freight or passenger – the recovery in volumes won't put them back in the black. More turbulence ahead then, mostly of the heavy variety.

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