The General Forecast Summary:
That Light?
It Might Actually Be
The End of The Tunnel
It Might Actually Be
The End of The Tunnel
This year, The Boyd Group forecast analyses - airline trends, traffic growth, and global fleet demand - all point to a future that is nowhere near as dire as some would paint it.
Actually, through the fog of media stories on bankruptcies and the shrieking proclamations of doom from a few financial analysts, the emerging fundamentals of the airline industry are sound. Yes, sound.
Indeed, once the current fuel-cost crisis is addressed by carriers in adjusting cost structures (which they will) our data shows a potentially robust future for most segments of aviation.
Total heresy, naturally, but this was a Forecast Conference, not a wallow in semi-factual history, which, incidentally, describes a good portion of what's being written about the industry today.
On the aircraft demand side, as we reviewed at our 2002 Forecast Conference in Sarasota, the demand for new-generation mainline-cabin aircraft is now just short of a boom. Boeing, Airbus, and Embraer are now all looking at very crowded orderbooks.
The only dark spot is in the area of regional jets, a segment of global fleet demand that has assumed room temperature. As we also forecast back then - to the guffaws of many - the demand for RJs is now at an end, and slow - or maybe fast - retirement of substantial portions of this fleet is inevitable. There will be a couple of hundred RJs soon vying for space under the sunny desert skies.
This week's announcement by Bombardier that the 50-seat CRJ is going out of production was a nice bit of validation. Now that it's a reality, plan on others earnestly beginning to "forecast" a decline in RJs in the industry.
That points to the small jet provider segment, - what other consultants still call "regional airlines" or, in one recent case, believe it or not, "commuters."
When it comes to "fading business models" the SJP segment defines the term. As our conference attendees learned four years ago, there's been a glut of these small jets, and their economics and ergonomics guarantee a major decline in the demand mega-carriers will have for them in the coming years. Not that they will go away, just that there's going to be a need for a lot fewer of them in the future.
Of course, most of this is at variance with the accepted thinking by many in the media and in academia, but give it a year or so, and they'll be parroting what our attendees learned at this conference.
Forecast:
Airline Industry Trends
It's Not "Over-Capacity" When Planes Are Full. When the industry is hovering around an 80% load factor, that means they're pretty much selling all of their product at times when people want to travel. The remaining 20% is the dregs - late night flights, positioning flights, mid-week and off-bank flying, etc. What seats have value to the customer, are mostly being sold out.
So it's pretty hard to claim that there's too much capacity when that capacity is chocka-block full. The issue, of course, is that it's hard to charge a price consumers will pay and at which an airline can get a reasonable ROI.
So, it's not really over-capacity. More correctly, there may be "over-competition" not over-capacity. There's a difference.
Over-capacity would be a case where there's a lot of unsold product in excess of market demand. Over-competition (for want of a better term) is where there are lots of players fighting for the demand, which depresses the prices that can be charged.
When the industry is running pretty much at capacity, the calls to end "over-capacity" are really calls for providing less product, thereby theoretically being able to charge more to fewer passengers - i.e., simply constrict capacity and squeeze lower-end, price sensitive passengers out of the market.
It's not going to happen, so all the babbling about the "need to consolidate to cut capacity" is just so much howling at the moon. Even the GAO recently issued a study concluding that when capacity has been materially reduced in the past, other carriers have replaced it quickly.
At the Conference, the forecast presentation outlined how fleets equivalent to the size of
Continental Airlines in 2001 (mainline) have been eliminated from the US airline system over the last four years, yet "over-capacity" continues. But more than that, the forecast presented data that indicated that these reductions in capacity have only resulted in reduced service levels at small and mid-size airports. Where the "over-capacity" existed, it's still there. The reason: airlines are going to chase revenues in big markets.
Bottom-line: if one or more carriers went to airline heaven, that "over-capacity" in major markets would remain, yet it would be smaller airports that would take the hit. Example: The pull-down of the US Airways PIT hub (which has not and will not be replaced) has left a lot of airports in the Middle Atlantic and Mid-South with less access.
The Future: Legacy Carriers, Not LCCs. Most analysts today are focused on comparing airline costs. What they've missed is the other side of the P&L: it's something called revenue. And this is where the legacies have the future advantage.
The forecast isolated where new domestic and international revenue flows will be emerging in the future, and the vast majority of it is out of the reach of the LCC model.
Big-Time Shrinkage: "Regional" Airlines. The bankruptcy of Mesaba should have been the first clue to the analysts who have been proclaiming that "regional" airlines are just soooo profitable and will effortlessly be able to replace those clumsy legacy systems.
These entities, which in fact are today neither "regional" nor airlines, are facing a substantial shake-out. What has been missed by a lot of the me-too analysts is that these entities are vendors, not airlines. The majority of their revenues come from leasing crews and airplanes - predominantly regional jets - to major airline customers.
The Boyd Group identified an emerging glut of both RJs and the number of RJ operators four years ago. It's now here. Our fleet forecast indicates that as many as 200 or more RJs will be heading for the desert (or wherever else) over the next 36 months. (We'd note too, that Bombardier's recent decision to stop producing 50-seat jets also validates the fleet forecasts provided at our Conference four years ago - one that was totally at odds with virtually every other fleet forecast available.)
Air Service Focus For The Future: Get Sino-Centric. The long-term traffic demand forecasts accomplished by The Boyd Group have identified a key future economic trend: if you're not connected to China, you're not going to be connected at all.
Face it, in ten years we'll be talking about the new, high-quality cars being imported from China, or being made in Chinese-owned factories here. We'll be talking about those new airliners that will compete with Boeing, Airbus, and Embraer. We're already using large appliances that are built in Chinese-owned factories in the US.
The point: ease of access to points in the Middle Kingdom will be a factor in economic growth of any region of the nation. Best positioned carriers: Northwest, United, and - eventually - American and Continental. Most of this growth will be at mid-size communities, where Chinese investment will be focused.
uke:that was a mouth full, huh?
