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‘Finding the Bottom’ - Are we nearing the bottom of the airline and economic cycle?


These days everyone is doing it, but few are confident they’ve done it – finding the “bottom” of the economic cycle, that is. CEOs, investors, politicians, economists, academics – everyone is desperate to find firm evidence of the elusive ‘bottom’, so the much-vaunted recovery can begin. Or will we just bump along the ‘bottom’? LATEST COMMENTS FROM BERNANKE, BISIGNANI, MAJOR FREIGHT COMPANIES AND MORE...

Below is a series of quotes from some of the best ‘Bottom Finders’ in the aviation business. The question is; who is most likely to be right? The real worry is perhaps that there appears to be such a diversity of views.

That might suggest that all we are really witnessing is a division between optimists, realists and pessimists.

The bottom line is thus probably that there is no clear indication of (1) whether things will fall further, or (2) even if they have bottomed, how long a recovery will take.

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Yes, the bottom is nigh...

US Federal Reserve: “We continue to expect economic activity to bottom out, then to turn up later this year. The recent data suggested that the pace of economic contraction might be slowing, including some tentative signs that final demand, especially demand by households, may be stabilsing…A relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall…We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly”, Ben Bernanke, Chairman. Source: AFP, 06-May-09.

IATA: “The only glimmer of hope is that cargo demand has stabilised this month [March], although at the shockingly low level of -21.4%. For the fourth consecutive month international cargo demand is hovering in the -21% to -24% region as a result of the sharp drop in world trade. It’s not the end of the recession, but we may have found the floor,” Giovanni Bisignani, Director General and CEO. Source: IATA, 28-Apr-09.

ACI: "Traffic data for freight traffic points to December 2008/ January 2009 as its lowest ebb point. Although the results remain very low, the declines have further softened in March. Recovery from this catastrophic slump is expected to take quite some time, but freight trends are mildly pointing up with better March results compared to Q1 results across all regions. Data indicates that domestic travel, as well as international traffic in Asia Pacific, could lead the beginnings of an upturn...These results and analysis for March and first quarter 2009 do not yet take into account the impact of the outbreak of swine influenza now witnessed in a limited number of nations", Media Statement, 30-Apr-09.

Delta Air Lines: “We have seen some signs of stabilisation, as the revenue environments appear to have bottomed out. But it’s still a bit early to call, and we expect to face significant headwinds throughout 2009”, Richard Anderson, CEO, 21-Apr-09

US Airways: “The revenue environment does seem to have bottomed out. It doesn’t seem to be getting worse, but it’s not getting better”, Scott Kirby, President. Source: Bloomberg, 23-Apr-09.

US Airways: “While air traffic on international routes is still weakening, travel in the domestic market seems to be stabilising. My view is that if we've bottomed but aren't improving, we should probably have less capacity”, Doug Parker, Chairman & Chief Executive. Source: Dow Jones, 23-Apr-09.

International Monetary Fund: “While there have been some positive signs over the last few weeks that the United States' economy might be bottoming out, these are very early days. We should not expect a return to growth any time soon”, Charles Collins, Economist. Source: DPA, 22-Apr-09

Amadeus: "We have a feeling that leisure bookings reached the bottom in the last four to five weeks. Business travel is still getting worse," Philippe Chereque, Executive Vice President, Commercial. Source: Reuters, 15-Mar-09.

Association of Asia Pacific Airlines: “Whilst the crisis confronting the industry remains acute, traffic levels do seem to be stabilising, even though there is, as yet, no sign of any uptick in demand that might signal the beginnings of a recovery process,” Andrew Herdman, Director General. Source: AAPA, 24-Apr-09.

Lufthansa: “[Based on forward bookings] it looks like it's bottomed out, but we are by no means certain, and a recovery has not begun. The decline in cargo traffic and revenue also appears to have hit bottom, [but] revenue plunged to a much higher degree than volume…It is apparent that the [cargo] market will remain at this extremely low level”, Chairman and CEO Wolfgang Mayrhuber. Source: ATWOnline/The Guardian, 30-Apr-09.

Atlas Air: “While global airfreight traffic remains weak, it appears to be showing signs of bottoming. Capacity reductions, particularly the retirement of older-generation freighter aircraft, are accelerating, which will mitigate the impact of reduced demand. Given these reductions, and the delays in the deliveries of newer-generation freighters, any improvement in demand could have an early and meaningful impact on AAWW", William J Flynn, President and CEO, 05-May-09.

Deutsche Post DHL: “Following the significant drop in volumes around the Group in the first quarter 2009, Deutsche Post DHL may now be reaching the bottom in terms of volume declines. If this were the case, the Group would expect to see increasing benefit in the second half of the year and in 2010 from its cost-cutting programme,” Company statement. Source: DHL, 06-May-09.

No, the bottom is later...

British Airways: "[Things are] getting worse. We haven’t yet reached the bottom, and everything points towards a protracted downturn. This is the greatest challenge our industry has ever faced", Willie Walsh, CEO. Source: Financial Times, 02-Jun-09.

American Airlines: “In the short term, we are expecting another busy summer, and we are going to use all the levers at our disposal to keep our airplanes full of paying customers - with the hope that we will be able to charge fares that enable us to turn a profit”, Gerard Arpey, Chairman and CEO, Travel Agent, 20-May-09.

Southwest Airlines: “May sales are quite soft…We're preparing...for a sustained recessionary environment where low fares will be needed and will carry the day," Gary Kelly CEO. Source: Chicago Tribune, 20-May-09.

Emirates Group: “As we move into the new financial year, the outlook is not improving. Although fuel prices are dropping, demand for business and first-class traffic is still weak in many markets.” Ahmed bin Saeed al-Maktoum, Chairman. Source: Emirates, 21-May-09.

Emirates: “We are going to see some more pain in the next 3-4 months. But by the end of this month, we will have seen the worst. April and May were not very good, but I’m hoping to see less decline in June… We did not expect the effect the crisis has had on the automobile industry. On the air cargo side of the business, it’s still okay,” Ram Menen, Divisional Senior Vice President Cargo. Source: Reuters, 13-May-09.

Airport Authority Hong Kong: "The aviation industry worldwide has yet to show signs of recovery as the gloomy economic outlook continues to dampen travel demand. This uncertainty has been worsened by the recent H1N1 influenza A outbreak", Stanley Hiu, CEO. Source: AAHK, 17-May-09.

Qantas (former CEO, Geoff Dixon): "This is the worst crisis I have seen in aviation in the past ten to 12 years. We’re not at the bottom yet, and premium traffic is being hit hardest, which is affecting airline yields. The upside is that airlines have become much more efficient and have prepared themselves well for this situation, so I’m optimistic for the long term. The industry may be a different beast, but it will recover", TFWA Asia Pacific and Gate One2One Conference, Singapore, 12-May-09

Malaysia Airlines: “This is one of the worst crises we have seen in a long time, and...we have yet to reach the bottom. The airline industry is facing a triple squeeze. First, we have seen falling demand since mid-2008. Second, most airlines don’t like to talk about this, but many of them hedged their fuel at US$100 when the oil prices was soaring, and now they’re stuck with over-priced fuel", Idris Jala, Managing Director & CEO. TFWA Asia Pacific and Gate One2One Conference, Singapore, 12-May-09.

Fraport: “We are nearing the bottom, but there will be more pain to come. I expect to see a layered recovery, with things starting to look better in Q3 or Q4 this year", Ansgar Sickert, Airport Operations India Managing Director. TFWA Asia Pacific and Gate One2One Conference, Singapore, 12-May-09.

CANSO: “With CANSO members controlling more than 80% of the world’s air traffic, we are uniquely placed to provide insight into the state of global aviation movements. This 8% decline should be viewed in the context of continued weakness across all sectors, with traffic down by double-digit figures in some key markets. While the signs of a slowdown in the rate of decline, as seen by the February-March trend, are welcome, it is too soon to say that we have reached the bottom. Until we see evidence to suggest a sustained upward trend in movements, the onset of economic recovery is still too early to call,” Alexander ter Kuile, Secretary General. Source: CANSO, 07-May-09.

British Airways: "I don't see a sign of improvement in the economic environment. It will get worse before it gets better,” Willie Walsh, CEO. Source: Reuters, 25-Apr-09.

TNT Group: “International express volumes are under significant pressure and Domestic volumes saw declines as well, but as of February we saw no further acceleration in the decline. Our cost savings initiatives in Express have delivered first results and are clearly ahead of our previously guided savings target range for the full year… nothing has changed with respect to our previously indicated cautious stance towards 2009: we assume trading conditions of Q1 2009 to persist through the rest of the year, although recent stabilisation in Express is a welcomed situation,” Peter Bakker, CEO. Source: TNT, 04-May-09.

UPS: “In the first quarter, the global economic downturn intensified…The second quarter is expected to be modestly weaker than the first. We anticipate second quarter GDP will also decrease quarter-over-quarter, but at a much slower rate than the decline we saw in the last two quarters. Hopefully, we will hit bottom later this year and begin seeing growth at the end of the year or early next year in the US”, Scott Davis, CEO, 23-Apr-09.

Southwest Airlines: “I’m certainly not ready to call the bottom yet. May should tell us a lot… An increase in business travel likely won’t occur for quite some time”, CEO, Gary Kelly. Source: Bloomberg, 16-Apr-09.

American Airlines: "For the moment, we're not seeing evidence of either improvement or further deterioration in the business," Tom Horton, CFO, 15-Apr-09.

Continental Airlines: “If you look at June, we have probably on a system basis only sold 30% to 35% [of seats] right now, a little more in the international arena than the domestic arena. But there’s an awful lot of tickets to sell between then and now and clearly while I wouldn’t be ready to call a bottom, the trend is not dropping as fast from what we can see and we see some stabilisation. It’s still going down a little, but it was going down a lot in our forecasts”, Larry Kellner, CEO, 22-Apr-09.

Cathay Pacific: "The outlook for our revenue is very poor and it could be a long time before we see the bottom of the market, let alone see any signs of recovery. It may be necessary to take some very difficult decisions about our network and about the company generally in order to secure the sustainability of this business," Tony Tyler, CEO. Source: Dow Jones, 16-Mar-09.

British Airways: “I cannot see the bottom of this crisis yet. There is some distance to go, and I would expect this very difficult environment to last for at least another 24 months”, Willie Walsh, CEO, 29-Jan-09.

Qantas: "It's certainly the toughest period I have seen and I have been in the industry for 20 years. We had assumed yields would bottom out, but we are now forecasting that deterioration to continue”, Alan Joyce, CEO. Source: Sydney Morning Herald, 15-Apr-09.

Global Insight: “The US economy will start growing early in 2010, spurring more interest in leisure travel. But business travel, hard hit by falling corporate profits amid dried-up credit markets, will take longer to turn around. The US government's fiscal stimulus plan should increase some business spending for travel, but the number of business trips for the next four years will be sharply lower than the peak year, in 2008. Overall travel prices are expected to bottom out in mid-2010”, Ken McGill, Travel Analyst. Source: Dow Jones, 01-Apr-09.

The Conference Board: "The March 2009 numbers indicate that we are not at the bottom of the employment cycle, but that the declines in labor demand may be slowing...The next two months, April and May, are when employers typically ratchet up their Spring hiring, and these months will be a good indication of whether labor demand is beginning to turn around," Gad Levanon, Senior Economist. Source: The Conference Board, 30-Mar-09.

The bottom is...I don't know?

Continental Airlines: “There remains a lot of uncertainty about the economic environment and we don’t yet know how deep or long this recession will be, whether or not we’ve hit bottom, how long we’ll bump along the bottom once we hit it and what our rate of climb out of that bottom will be”, Jeffery Smisek, President and COO, 22-Apr-09.

The bottom is...I don't really care...

AirTran: “There has been a lot of conversation about the industry is that a bottom or not. [A] weak economy means weak commodity prices and again that’s a very good position for us to be in. Again we always have an opportunity to evaluate opportunities and I think if numbers continue as we expect, we have opportunities to debate the growth [rate]. But right now, our goal is to earn our way out of the losses that we had in 2008”, Bob Fornaro, Chairman, President & CEO, 22-Apr-09

Allegiant Travel Company: “We are confident unit cost savings will thoroughly overwhelm any unit revenue softness, resulting in another strong quarter,” Maurice Gallagher Jr, CEO and President. Source: Allegiant Travel Company, 19-Apr-09.

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