Economic crisis: But no-one has told travellers and consumers


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The world economy is supposedly on the brink of catastrophe as housing prices slump, business and consumer sentiment hits 20-year lows, oil prices soar, food and commodity price inflation is rampant, inflation is spreading like wildfire - but consumers and travellers are spending like there is no tomorrow.

Why? What has happened to that great forward economic trend indicator, airline demand? This highly discretionary item is the first to go when times start looking tough. So why hasn't traffic slumped yet? Are the airlines crying wolf after all? The answers may yet be found in June and July's results. But meanwhile, traffic data suggest a quite different scene.

Today's report of AEA airline performance in May is confusing in this context, to say the least. Across the board, international demand almost exactly matched the 5.5% increase in seat supply, as revenue passenger kilometres (RPKs) increased 5.1%. And intra-Europe performance was even stronger, at a very healthy 7.4% growth, actually outstripping capacity increases, so that passenger load factors rose 1.0%. Here, little has changed over the past year, as good growth rates have been maintained.

AEA passenger traffic (RPK) growth on intra-Europe service: Jan-07 to May-08

Source: Centre for Asia Pacific Aviation & AEA

In the UK, where the slowdown has been most marked so far, general retail figures too have held up surprisingly well. Last week, however, Marks and Spencer reported its largest fall in sales since 2005 and its executive chairman, Stuart Rose, observed that the slowdown in consumer spending may ``take longer to feed through than people think.''

Behind all this, there can be little doubt that something nasty is happening to the world's economy. A week ago, the Bank for International Settlements (BIS), known as the central bank of the central banks, made an extraordinary statement, effectively warning of a global economic meltdown unless interest rates were increased. This suggests bad news either way, for governments preoccupied with the threat of recession, who want low interest rates to help steer out of the doldrums.

And in the world's leading economy, some pretty bizarre share market fluctuations also suggest that things are not as they should be. On Tuesday, for example, Northwest Airlines' share price rocketed up a remarkable 31% - on news that oil prices had fallen USD5. To USD135! Then, yesterday, the airline's stock fell back to earth, shedding 16% of its capital value on its announcement of 2,500 job cuts and a new baggage charge (actions which, for other airlines recently, caused their share prices to rise).

So, the Europe's May data may just be the warm feeling that precedes the awakening. As the AEA report points out: "Preliminary results for June paint a very different picture. Figures derived from weekly reports point to a very sharp fall-off in the growth rate on intra-European services." Nonetheless, there is nothing out of the ordinary about growth lines of the big three network airlines in their recently-reported June figures.

Lufthansa, British Airways and Air France-KLM passenger traffic on intra-Europe routes: Jun-08
*Lufthansa intra-Europe traffic including Germany and Swiss from Jul-07
Source: Centre for Asia Pacific Aviation & Company reports

Perhaps it is the LCCs that are feeling the pain at this time to a greater extent than AEA's network airlines. But their headline numbers do not bear that out. Ryanair and easyJet (including GB Air) also remained strong in June, despite large capacity increases. And there are no pervasive suggestions of yield softening, with load factors holding up.

Select European carriers passenger traffic growth (year-on-year change) and passenger load factor (%): Jun-08
Source: Centre for Asia Pacific Aviation & airline reports
^ Europe services traffic data * includes GB Airways

Then there is freight, the onetime lead economic indicator. AEA airlines' intra-Europe international freight traffic fell a very large 13.0% in May, year-on-year. But, despite low growth numbers for longer haul markets, these were mostly in positive territory.

For the time being, the warm feeling persists. But surely the weight of negative sentiment will soon tell. Then again, maybe not.

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