+ ON THE SOAPBOX: Professor Chris Tarry - Principal at CTAIRA

A regular contributor to Travel News Update, Professor Chris Tarry, head of CTAIRA, one of the world’s leading independent airline analytical consultancies, is also closely involved with Airline Business, sister company to Flight Global.  For relaxation he enjoys cruising and joined The Times 'Literature Festival at Sea' last November on Cunard's Queen Mary 2.   www.travelnewsupdate.co.uk/article/520

With Farnborough behind us Tarry considers 2025 and beyond. Twelve months ago, he looked at the air transport industry from an economic point of view.   www.travelnewsupdate.co.uk/article/372. Times have changed.


“As I have opined, there is in reality no useful or meaningful industry view given the wide range of regional and company specific factors that impact upon individual airlines beyond the more generalised ones of the price of fuel which is likely to rise, and the dollar which is currently at the low point for 2024.

For any company profit (or loss) is the result of large numbers, usually moving in different directions and this certainly continues to be the case.

My past warning stands.  The prolonged “recovery bubble” that followed the removal of Covid travel restrictions would eventually burst as the influence of the key economic factors, and particularly the rate of economic growth, GDP, came to the fore.

Although the actual relationship with GDP is somewhat more complex than was generally accepted in the past where traffic grew at some multiple of real economic activity, household income in particular remains the key driver of traffic.  In the UK and most of Europe economies are essentially “flat lining” and although some media outlets get very excited about small movements, the reality is that these are almost imperceptible.

What has been a particular surprise of late has not been that we have seen, particularly in Europe, poorer than expected financial outcomes and reduced forecasts, but that some managements and analysts were in fact surprised and appeared to be behind the curve.  Air France’s admission of a summer shortfall as a result of the Olympics is a case in point.

There are a number of cases where managements should “put their hands up” and admit that poor performance is actually down to them and their team but such actions and subsequent resignations are conspicuous by their absence.

We are also beginning to see in Europe the re-emergence of what is in effect diversionary acquisition; there is no doubting the excitement that surrounds “the chase” but even before completion the process can absorb significant management time and a loss of focus.

In the case of IAG and Air Europa, which for the reasons it did not take place was in my opinion always a non-starter, it will be interesting to learn of the direct and indirect costs that were associated with this excursion.

What then of how the near and medium term might look like? In respect of some of the key industry wide factors such as fuel, the expectation is that prices will rise.  The value of the dollar will be determined by both the path of the US economy but also the expectation of and subsequently the actual result of the election. In terms of interest rates, whilst they are expected to fall but probably at a slower pace than generally anticipated, the reality is that rates are now structurally higher than they were for almost half a generation after the great financial crisis, which inevitably impacts on both the cost of capital and the returns that will be required. Attention then should focus on the outlook for economic growth.

Even the most cursory glance of the latest economic forecasts from the IMF or indeed any other credible forecaster, shows a continuing and widening gap between those countries in the northern and western hemispheres, generally slower and lower, and much of the rest of the world. In simple terms by 2029 the majority of European countries will see their economies between 6% and 20% larger than in 2019; for the record, the UK is expected to be some 11% larger over this period which is about the same as France; the positive outliers are Ireland and Turkey where the economies are expected to be some 50% larger in 2029 than they were in 2019. The consequences for growth in outbound traffic are reasonably clear cut – also slow and low.

It is no surprise that countries in the region that is now known as “The Global South”, including Central Asia, will exhibit much faster rates of economic growth with the concomitant benefits not only for airline traffic. The momentum in the region is also backed up by infrastructure investment to ensure that what in the forecasts is in effect latent growth becomes real. These are also the regions which in addition to the Gulf are more investible – a simple case of “follow the money”.

Another area where the gap will continue to widen will be between those airlines that have orders in place for near term delivery and those that do not given the operating benefits of the new generation equipment, notwithstanding the higher ownership costs.

It should have come as no surprise just how few orders were placed at Farnborough given the backlogs already in place and that there are few delivery slots much before 2031.There has always been a degree of shuffling of the order books and we expect to see perhaps more re-direction of orders in place than usual, along the same lines where most recently flynas, new Saudi air carrier, will be receiving the A321s and A320s that were originally destined to go to US airline Spirit. There is little doubt over the increase in the value of nearer term delivery slots reflecting the tightness of supply which some airlines might wish to capitalise on. Against the background of a slowing market in some regions the strength in others reduces what used to be the problem associated with overdelivery.

Elsewhere on the supply side the issues with the geared turbofans continue to impact a number of airlines and materially so – something that will be expensive in terms of compensation. Beyond this and looking towards 2026, it is yet to be seen what if any further delays there will be to the Boeing 777X programme following the news that cracks have been found in the engine pylons.

Of course, the “supply side issues” also provide an example of why generalisations are dangerous – in the cases above the focus was very much on the shortages resulting from manufacturer related problems and shortages. Replacement aircraft are OK, but new ones require slots.

Certainly, in the case of most if not all of the European and North American airlines, the first part of 2024 represented a turning point from an environment where all that had to really be done was to get aircraft flying again. Indeed, we have just seen the credit rating agency downgrade the North American airline sector in the light of concerns about over capacity – fares appear to have peaked some time ago.

There is little doubt that growth will continue but in addition to the variation in the rates of economic growth that will remain the principal driver of airline traffic, airlines have different exposures to a range of geo-political events which too will have an influence.

www.ctaira.com

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READERS' COMMENT

All comments are filtered to exclude any excesses but the Editor does not have to agree with what is being said. 200 words maximum

Paul Beauchamp, Fareham, Hants PO15 7FL

NATS has long sought ways to maximise the throughput of its runways. It was the first air traffic service provider in the world to introduce Time Based Separation when it went live for Heathrow arrivals in 2015. This has cut airborne holding by 230,000 minutes a year, the equivalent of approximately 47,000 tonnes of saved CO2. It has since exported its Intelligent Approach tool to both NAV CANADA and LVNL to help boost capacity at Toronto and Schiphol Airports. In Amsterdam in particular the impact was immediate, releasing an additional 3-6 arrivals an hour, per runway during strong headwind conditions once it went live in 2023.

Jill Smith, United Kingdom

The IAG Air Europa situation, as noted by Chris Tarry, was a obvious non starter from day one, another Willie Walsh scheme that looked dubious from the very beginning . As an independent airline it can now go head-to-head with Vueling and its sister company Iberia.

James Shaw, United Kingdom

Mr Tarry mentions the background of slots distribution. Vital for airport expansion. But what he fails to explore is the future for air traffic management where NATS is an international leader in making far greater use of runway availability.