Analysts: Airline Demand To Remain Weak In 2010

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Madhu Unnikrishnan madhu_unnikrishnan@aviationweek.com

The recession's effect on demand for travel will have more of an impact on airlines' bottom lines than the rising cost of fuel through this year and 2010, rating agency Moody's said in a new report on the airline industry.

Citing Air Transport Association data, Moody's notes that airline industry traffic worldwide has fallen by 9.1% year-over-year in the first quarter of this year. The ratings agency predicts that this trend will continue through this year and into next. U.S. demand for air travel during the peak summer travel season is expected to be down 7% from last year.

Traffic remains depressed because demand is soft and not expected to rise, Moody's said. The global economic downturn, the worst in 70 years, has eroded consumer confidence and is putting pressure on discretionary spending on leisure travel, the agency said. This is also having an effect on carriers' ancillary revenues, such as curbside check-in and fees for checked bags.

Business travel and lucrative international routes also are coming under pressure as demand for such travel continues to fall, Moody's said. This trend is unlikely to reverse itself in the coming year. Tellingly, forward bookings are off and are affecting airline revenues.

Capacity discipline has kept load factors high, as airlines took capacity out of the system in the wake of last year's fuel cost spike. But Moody's predicts that airlines will not be able to cut capacity enough to offset soft demand. Airlines may cut capacity during the peak summer season instead of in September, which is more typical. But this may not be enough, Moody's said.

"Although [capacity cuts] will provide some relief from variable costs such as fuel and maintenance, it is likely to increase unit costs because the large fixed costs of the airlines will be spread over fewer paying customers," Moody's said.

Fuel costs remain a concern, although Moody's predicts the fall in demand will be more of a problem for airlines. Carriers are unwinding fuel hedges put into place during last year's spike, drawing down cash, while also having to put new hedges in place, Moody's said.

Although several carriers have cancelled or deferred aircraft orders, those that do keep their orders on the books may encounter difficulties securing financing, given the precarious state of the industry, Moody's said.

Moody's predicts the economic recovery will be "hook shaped," or in other words, the U.S. economy will contract by as much as 3% this year and grow by only 1% or 2% in 2010. The agency is not ruling out an "L-shaped" recovery, which would result in little or no growth next year.

Midway Airport photo credit: Chicago Dept. of Aviation

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