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2009- a terrible year for iata airlines

Discussion in 'Biashara, Uchumi na Ujasiriamali' started by ByaseL, Feb 22, 2010.

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    ByaseL JF-Expert Member

    Feb 22, 2010
    Joined: Nov 22, 2007
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    The airlines business is not for flaccid hearts or weaklings. To invest in an airline you need an extra nerve to withstand the rigors of the treacherous nature of the airline business. Not only is this business risky but it is complicated if not mind boggling. To start with, as a general rule of thumb the airline investment is highly capital intensive in the sense that airplanes don’t come cheap. Neither is its labour to drive it because it requires highly skilled personnel particularly the pilots and aircraft engineers who take a long time to groom and consume a lot of financial resources. The airline business is hi-tech driven in the sense that aircraft are exquisite machines with state of the art technology and other ancillary gadgets. These don’t come cheap either.

    The airline business is one of the highly regulated business in the world. For instance, before you set up an airline there is a very elaborate process one has to go through to convince the Civil Aviation Authority to issue a Certificate of Competence otherwise known as Air Operator’s Certificate ( AOC), Air Transport License to operate specific routes and a Certificate of Airworthiness for each aircraft to endorse that the aircraft is technically sound in a flying condition. Plus there are a myriad other technical conditions to be fulfilled. It is a tall order indeed but let this be a tale for another day.

    As far as the international airline operations are concerned, airlines operate under the aero-political framework known as Bilateral Air Service Agreements (BASAs) between countries and depending on the nature of agreement some are restrictive and others flexible. Airline Business is cyclical in behavior implying that there is a peak and low season with a direct impact on the business cash flows. Moreover, airlines’ products are highly perishable commodities. Last but not least the airline business is very susceptible to natural and man made calamities. Do the Influenza H1N1 and the Swine Flu epidemics ring a bell here? We are all witnesses to the havoc these two outbreaks created in the aviation industry. All these issues to a great extent impinge on the airlines’ operations and ultimately affect the airlines’ bottom-line.

    Because the airline business is a very high profile industry, airlines have sometimes been wrongly used by some people to champion certain political agendas. For example, aircraft hijacking was a very common phenomenon during the 1970s as one of the means to address Middle East political grievances. On 11th September 2001 some United States of America (USA) airlines’ airplanes were hijacked mid air and smashed into the Twin Towers and Pentagon buildings in New York and Washington respectively with a terrible loss of life and property!

    The Nine Eleven incident (as it has been named) had a devastating impact on the airline industry. In the blink of an eye, passenger numbers worldwide fell sharply to record low levels leaving the airlines with excessive capacity. Faced with this development most of the big airlines had no choice but to cut back on capacity by grounding some of their fleet, some prematurely returned leased aircraft to lessors, others cancelled orders for new aircraft with manufactures and many put their staff on furlough until the situation improved. As the aviation insurance went through the roof, a few airlines could not make it and went under and biggest casualty of this poignant attack on the USA soil was Sabena Airlines of Belgium and Swiss Air of Switzerland. It took about two years for the passenger traffic to rebound and set the airline industry back into positive territory in terms of profitability.

    Enter the Global Financial Crisis in late 2008. The financial meltdown which started in the USA and spread like wild bush fire around the world should have been the last thing to happen to the aviation industry which hitherto was still picking some pieces arising from the Nine Eleven debacle seven years earlier. As the world went into recession so was the knock on effect on the airline industry. But this time it was not the passenger traffic alone which suffered but also the cargo traffic because of the shrinking trade between countries.

    According to the International Air Transport Association (IATA) 2009 was really bad news for its member airlines.

    IATA reported December and full-year 2009 demand statistics for international scheduled air traffic that showed the industry ending 2009 with the largest ever post-war decline. Passenger demand for the full year was down 3.5% with an average load factor of 75.6%. Freight showed a full-year decline of 10.1% with an average load factor of 49.1%.
    “In terms of demand, 2009 goes into the history books as the worst year the industry has ever seen. We have permanently lost 2.5 years of growth in passenger markets and 3.5 years of growth in the freight business,” said Giovanni Bisignani, IATA’s Director General and CEO.

    International passenger capacity fell 0.7% in December 2009 while freight capacity grew 0.6% above December 2008 levels. Yields have started to improve with tighter supply-demand conditions in recent months, but they remained 5-10% down on 2008 levels. “Revenue improvements will be at a much slower pace than the demand growth that we are starting to see. Profitability will be even slower to recover and airlines will lose an expected US$5.6 billion in 2010,” said Bisignani. IATA represents some 230 airlines comprising 93% of scheduled international air traffic.

    However, according to IATA by the end of the year 2009 there was some renewed growth in terms of Revenue Passenger Kilometres (RPKs)
    which went 4.5% higher than December 2008. The airfreight was even more extreme down and up. It is reported that December 2008 was the lowest for the airfreight market but by December 2009 the market had rebounded by 24.4%. Nevertheless the overall total for 2009 was 10.1 % down on 2008 which makes it the largest post-war decline for the international airline industry. The report further says that the timing of the low point of the recession in the industry, at the end of 2008 for freight and the first quarter of 2009 for passengers, means that the annual totals for 2009 disguise the severity of the downturn.

    The statistics indicate that in all three of the largest aviation regions in the world –Asia/Pacific, Europe and North America- saw a similar average decline in the passenger traffic they carried (5%-6%) in 2009 but Asia/Pacific airlines stand out as benefiting from a rebound by the end of 2009. However, despite positive renewed year-on-year growth rates, international markets are still far from fully recovering from the recession. The report concludes.

    It is quite obvious that the airline business is a volatile undertaking and therefore needs patience, resilience and above all investors with deep pockets who are capable of enduring the turbulent nature of the business. The recent Japan Airline’s (JAL) seeking of Chapter 11 protection is a fresh example of how treacherous the airline industry can be. That is why in a poor country like Tanzania the government’s involvement in this sector is a sine qua non to guarantee a long term stability of the airline industry.

    Byase Luteke
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