Passenger Decline Stabilizes - Some Improvement in Freight

The 17.4% decline in international cargo demand is a relative improvement compared to the 21.7% drop in April. Since December 2008, cargo demand has been moving sideways in the -20% range. This is one of the first physical signs of the economic recovery being anticipated in equity markets. International passenger demand weakened from the -3.1% recorded in April to -9.3% in May. But both of the past two months have been slightly stronger than the 11.1% decline reached in March, even after adjusting for the distortions caused by the timing of Easter. This indicates that a floor may now have been reached. However, the capacity adjustment of -5.0% in May did not keep pace with the fall in demand during the same month. Moreover, although the impact of the recession appears to be stabilizing, strong headwinds from debt and low asset prices are expected to weaken and delay any significant recovery. We may have hit bottom, but we are a long way from recovery, said Giovanni Bisignani, IATAs Director General and CEO. Capacity is not aligned with demand. Passenger load factors dropped 3.3 percentage points over the last 12 months. The impact on revenue is dramatic. After a 20% fall in international passenger revenue in the first quarter, we estimate that the drop accelerated to as much as -30% in May. This crisis is the worst we have ever seen, said Bisignani.

May was the first full month to feel the impact of the Influenza A(H1N1) on travel. Mexican carriers saw their traffic fall almost 40% in May. Latin American carriers saw their traffic decline by 9.2% in May compared to the previous year. Against a capacity increase of 0.2%, the load factor plummeted to 64.7%. That is a 6.7 percentage point drop compared to May 2008 and the lowest load factor among all the regions. We estimate that the global impact of Influenza A(H1N1) on global travel patterns in May was a 1% drop in passenger traffic.

Asia Pacific carriers recorded a 14.3% fall in demand. While capacity adjustments by the regions carriers were the most severe (-9.3%), they did not keep pace with the fall in demand driven by weak economies and the impact of Influenza A(H1N1) on the region with the most vivid memories of the SARS crisis.

North American carriers posted a 10.9% fall in passenger demand, considerably worse than the 4.2% fall in April. This was the result of weak demand to Latin American destinations affected by Influenza A(H1N1) along with significant recession-driven drops in both trans-Atlantic and trans-Pacific markets.

European carriers, in additional to weak long-haul markets, saw some loss of market share to European low cost carriers whose traffic grew by 2.1%, while the network carriers reported a 9.4% decline.

African carriers saw a slight improvement of a 6.0% fall in demand in May, compared to a 7.1% decline in April.

Middle Eastern carriers bucked the declining trend with 9.5% growth in demand and a 14.5% expansion of capacity.

In May, freight volumes rose by around 3% above April levels as manufacturers began to add to their product inventories in anticipation of an economic recovery. However, inventories remain 10-15% higher than normal in relation to sales levels, indicating that a significant recovery is not expected in the near term. Surveys of purchasing managers indicate we could experience a further improvement in air freight demand during June and July to levels that are 12-15% below last years levels.

Most regions were relatively aligned in the severity of the freight declines. Latin American carriers were the worst performers with a 21.0% fall, followed by Africa (-20.0%), Europe (-19.2%), North America (-18.8%), and Asia Pacific (-18.1%). Middle East carriers were the exception with a 3.7% fall.

Capacity adjustments in freight markets have been catching up to demand declines. Freight load factors are 3.6 percentage points lower than a year ago. Freight yields fell by 17% in the first quarter, reducing revenues by 35%. Given the continuing downward pressure on yields, even the improvement in volumes in May will likely come without a corresponding improvement in revenues.

We have lost several years of growth and yields are under severe pressure. Airlines are in survival mode. Cutting costs and conserving cash are the priorities, said Bisignani. Even if we look beyond the crisis, it is difficult to see a return to business as usual. This crisis is re-shaping the industry. The burden cannot be placed on airlines alone. All partners in the value chain must be prepared to changereducing costs and improving efficiencies. Too often we get the opposite. Already this year we have seen US$1.5 billion in cost increases from airports and air navigation service providers. Its irresponsible in the best of times and a completely unacceptable abuse of monopoly position in a crisis, said Bisignani.