FT LEX comment on airlines and future demand

13.8.2010 (Financial Times)

Maturity doesn’t always bring stability. For airlines, the opposite is true:
maturity means high fixed costs and lease payments, making them both operationally
and financially geared. As a result airlines are intensely sensitive to the economic
cycle: shares in British Airways, Air-France KLM, Continental and Delta swing
more than underlying markets (their betas range from 1.1 and 1.9).

The stock market path of fast-growing budget carriers Ryanair and Easyjet is
smoother (betas of 0.5 or so).

Managing a volatile business is difficult, but in the past airlines have hardly
made life easier for themselves. They rushed planes back into the air whenever
economic conditions improved, swamping demand and pushing down ticket prices.
News that Cathay Pacific, British Airways and others are beginning to wheel 747s
out of desert storage raises the fear that they making the same mistake again.

Last year, airlines cut capacity back to 2007 levels; now it is 10 to 15 per
cent higher, according to consultancy Ctaira. Yet much of that is down to a big
bet by Middle Eastern airlines. North American airlines, once the worst offenders,
have hardly expanded capacity at all this year, even though traffic is up 6 per
cent. The result is fuller planes (87 per cent in June compared with an industry
average of 80 per cent) and higher ticket prices.

So far, not too extreme. But in a few months time, airlines will have to decide
on capacity for summer 2011. They will be tempted to keep adding planes. After
all, demand is already back at pre-recession levels and holding planes in storage
is nothing but a cost. They will also fret about losing market share to bolder
rivals. However, with the economic recovery looking more fragile than ever, excessive
enthusiasm should be left to the immature