Flight to gold - airlines brace as financial storm intensifies


Gold prices posted their biggest one-day gain on 17-Sep-08 (up USD70 an ounce to USD870.90 in New York, and even further in electronic trade), as the turmoil on global financial markets intensified. The previous largest dollar gain was USD64 on 29-Jan-1980.

  • American International Group bailout has failed to quell investor fear;
  • Talks on for buyout of ILFC;
  • Potential impact on aircraft valuations;
  • More financial sector turmoil will have impact on already weakening business travel;
  • Airbus recorded no new aircraft orders in Aug-08 – first time since SARS crisis;
  • AAPA expects member airlines to slow capacity expansion next year.

Oil prices also rose USD6.01, or 6.6%, to USD97.16 per barrel in New York, as investors fled equities in favour of 'safe haven investments', like the yellow and black gold.

The US Government has bailed out American International Group (AIG), parent of lessor ILFC, London City Airport, among myriad other interests that impact directly and indirectly on the aviation industry (not to mention its huge role in travel insurance). But the USD85 billion package has failed to quell investor fear, with the Group's shares falling heavily again overnight.

Asset sales are inevitable (possibly at knock-down prices) and talks are on in earnest for a buyout of ILFC (which controls 1,000 aircraft valued at USD50 billion), though potential buyers have not been named yet. If a fire sale of ILFC occurs, there is a potential impact on aircraft valuations.

This prompted a fall in Boeing's share price of 7.6%; Airbus (EADS) stock fell 5.6%.

Other financial sector takeovers, including the largest UK mortgage provider, HBOS, are likely, compounding the job losses in the sector that will have a direct impact on business travel in this region.

Airport Authority Hong Kong CEO, Stanley Hui, observed, high fuel prices, rising inflationary pressures and global financial volatility are exerting "escalating pressure on the aviation industry worldwide". He added the operating environment for the rest of the year "will continue to be difficult". Hong Kong International Airport reported a 5.3% slump in passenger numbers in Aug-08 (as Cathay Pacific's passenger numbers advanced just 0.2% - meaning other airlines are experiencing big falls in demand).

Meanwhile the Association of Asia Pacific Airlines (AAPA) expects member airlines to slow capacity expansion next year as the global economic slowdown curbs demand for air travel. Capacity growth is likely be in the "low single digits" in 2009, according to Director General, Andrew Herdman. He stated the current downturn is going to be more prolonged and while oil prices have come off their peak, providing "a measure of relief, it's too premature to say that we're out of the woods".

Aircraft orders may already have been affected. Airbus recorded no new aircraft orders in Aug-08 for only the second time in more than a decade. The other month of zero orders was in the depth of the SARS crisis in May-03.

As worst-case scenarios now play out on global financial markets, the entire aviation industry can do little but look on and hope the carnage stops soon. Otherwise, more industry workers will suffer the fate of their financial sector counterparts. But right now, the enemy appears to be attacking from all directions.

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