Consolidation for the airline industry is on the cards for 2009, while the aviation industry's late cycle may spell trouble for plane makers. The airline industry will be consistently on the back foot for most of next year because of the economic slowdown. The industry's passenger volumes have now contracted for two consecutive months, according to figures from IATA, going into what should be one of the busiest times of the year for airlines.
Already weakened by high oil prices the pace of airline bankruptcies may begin to pick up unless major consolidation starts to take place. Airlines such as Olympic, Alitalia (almost) and Silverjet have all gone bust this, while a further 20 airlines are on the IATA watch list for airlines in financial difficulties. There will almost certainly be more casualties with Aerolineas Argentinas, which has crippling debts, on the verge of being seized by the government.
Areas to watch will be the crucial US market and the transatlantic routes, where traffic decline was 0.8 per cent in November and 0 per cent, respectively. Any sign of improvement in these markets next year would almost certainly signal the start of a general economic recovery as airlines are incredibly sensitive to movements in the economy. However, in the meantime, pressure on margins will continue as carriers slash ticket prices to encourage passengers.
Events are starting to progress at high speed and we will know by the middle of next year whether British Airways is successful in its merger discussions with both Qantas and Iberia. This would create the world's largest carrier, although Iberia is said to be asking for precedence over the Qantas deal. The move by BA makes sense in a market where consolidation is already well underway, but there may be legal issues if the economy improves enough to make airline regulators wary of allowing companies to emerge with monopoly power.
The fortunes of airlines are inextricably linked to the civil aviation industry. Record order books have cushioned manufacturers like Airbus and Boeing with demand for new planes especially high.
But it seems clear now that a bubble for aircraft broking appeared in the years before the current recession on the back of cheap credit. The lack of finance for aircraft has started to feed through into delivery deferrals. Some estimates put a funding shortfall for aircraft financing - aircraft due to be delivered, but not yet paid for - at $20bn next year. This is far above the normal credit the industry can provide.
