Aviation Industry Hit Hard as Slowing Economy Hurts Travel Demand

By: iStockAnalyst Saturday, October 04, 2008 2:34 PM

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(By Salman - iStockAnalyst Writer)American Aviation industry, which had been earlier hit hard by a sharp hike in fuel prices, is now facing a drop in passenger traffic and travel demand as credit crisis deepens and recession fears mount. Americans are travelling lesser by air as employers, hurt by housing slump and credit crisis continue to slash jobs. More and more Americans are cutting down on consumption and are seen shifting to cheaper alternatives like railroads.

September marked yet another month of declining traffic and capacity at US carriers. Six of the nation’s 10 largest carriers have reported dismal traffic numbers. Earlier, in August, the 19 biggest commercial airlines flew 60 million passengers, three million lesser than the same period a year ago. Revenue passenger mile is headed southwards. Revenue passenger mile is a widely watched industry measurement accounting for one paying passenger flown one mile. Airlines have also been cutting capacity – measured in available seat miles – in order to counter the higher cost of jet fuel.

Tempe, Arizona-based US Airways Group Inc. reported a 1% decline in its mainline traffic .The airline said its mainline revenue passenger miles, for the month were 4.64 billion, down 1% from 4.69 billion last year. Total mainline available seat miles were 5.79 billion, lower than 6 billion in 2007. Passenger load factor, or the percentage of seats filled with passengers for the month was 80.1%, up 2 points from 78.1% in the last year same month.

Similarly, AMR Corp. announced that its September traffic at American Airlines fell 9.1% from the year-ago period to 9.86 billion revenue passenger miles. Capacity also declined 7.0% to 12.87 billion available seat miles from last year. Load factor, or the percentage of available seats filled with passengers, fell in September to 76.6% from 78.4%.

Atlanta, Georgia based, Delta Air Lines Inc. said on Friday its total September traffic fell 0.8% to 9.71 billion revenue passenger miles from 9.79 billion a year ago. Total September capacity fell 3.7% to 12.14 billion available seat miles from 2007. Load factor rose for September to 80% from 77.6% last year.

Passenger traffic was also down at Northwest Airlines Corp. (NWA). The total September traffic fell 0.5% to 6.2 billion revenue passenger miles from 6.24 billion last year. Total September capacity fell 0.1% to just under 7.45 billion available seat miles from last year. Load factor, or the percentage of available seats filled with passengers, dropped to 83.3% from 83.7% a year ago.

The biggest drop was observed at American Eagle’s San Juan-based Executive Airlines, which saw its traffic declining by double digit. Total September traffic fell 21.9% on a 17% slash in capacity.

Alaska Airlines was the sole airline to report a gain in passenger traffic. Its traffic edged up 0.2% in September compared with the same month a year ago. The carrier said it flew 1.43 billion revenue passenger miles last month, compared with 1.427 billion revenue passenger miles in the same month a year earlier.

Southwest Airlines Co., with 0.8% growth, has been the only carrier among the six to fly more capacity.

In order to counter the impact of current crisis, more and more of US carriers are now considering job cuts. Recently, Sun Country Airlines warned its employees to prepare for the possibility of major layoffs -or a shutdown of the airline - as early as Dec. 1. Earlier, Alaska Airlines confirmed that it will cut capacity by 8% this winter and slash up to 1,000 jobs.

Air Transport Association estimates that U.S. airline losses would total $7-10 billion in 2008, while there is possibility of even more losses in 2009 as global economy looks all set to fall into a recession. Association says further that even if oil prices continue to swing in the airlines' favor, any cost cuts are destined to be overshadowed by steadily worsening demand.

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10/7/2008 10:50:43 AM CEO by Patrick Salman analysis is more to the point. Airlines did indeed cut capacity. They did so in the hope of increasing payload factors and thus profits. However, the consumer is being hit very badly by the credit crisis which began in 2006. Evidence is readily available such as Bank of America's 3rd quarter results whereby earnings are down 68% because of credit card and consumer debt defaults. Consumer credit lines have been exhausted or as in many cases, the banks have cut back the amount available on existing lines. Home equity is declining and in many cases negative. Unemployment levels are heading towards 8%. These are the same consumers that buy airline tickets. Business is impacted in a similar way. They find it harder and harder to obtain short term credit facilities and thus experience cash flow problems. If the consumer has less money to spend or is afraid to spend what they have, if business access to working capital is constrained and if airlines have to push up fares and charges because of spiking fuel costs then traffic has to fall and losses rise. Capacity cut backs are not the cause but the consequence of market conditions. Reply Rating: (1) (0)

Salman analysis is more to the point. Airlines did indeed cut capacity. They did so in the hope of increasing payload factors and thus profits. However, the consumer is being hit very badly by the credit crisis which began in 2006. Evidence is readily available such as Bank of America's 3rd quarter results whereby earnings are down 68% because of credit card and consumer debt defaults. Consumer credit lines have been exhausted or as in many cases, the banks have cut back the amount available on existing lines. Home equity is declining and in many cases negative. Unemployment levels are heading towards 8%. These are the same consumers that buy airline tickets. Business is impacted in a similar way. They find it harder and harder to obtain short term credit facilities and thus experience cash flow problems. If the consumer has less money to spend or is afraid to spend what they have, if business access to working capital is constrained and if airlines have to push up fares and charges because of spiking fuel costs then traffic has to fall and losses rise. Capacity cut backs are not the cause but the consequence of market conditions.

Rating: (1) (0)

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