Opinion: Asian recession will be worse than forecast; just look at aviation figures

By Neville Bennett The weekend news that the US and Japanese economies were diving did not surprise me. I look at a series of indicators which had picked a fall. Besides the futures market, I keep an eye on the Baltic Exchange for sea traffic and IATA for aviation. IATA reported that international air cargo a fell by 22.6% in December year-on-year, and this has worsened in January 2009 with a 23% year-on-year drop. People in tourism especially should be aware that the Asia region and Trans-Pacific travel are the worst hit in the recession. It is significant that Asia is the worst hit region in aviation revenue. This does not square too well with the general perception that the recession is biting deeper in the USA, UK and Europe. Many analysts look to China, India, Taiwan etc to pull the world out of recession. The aviation figures suggest a radically different view: perhaps Asia is pulling the world into recession. A number of readers have approached me recently about my views on the length of the recession and how they can position their business. I have assured them that recessions actually have positives, and with the right strategies companies can survive and actually grow or improve their market share. The trick is to get the strategy right, and one key component is a good industry overview. I am looking at aviation this week because, outside of finance, it may be in the most challenged area. But it is remarkably adaptive and will thrive. I think its problems will interest all business. Bellwether The air industry is closely related to economic growth: it expands at double the rate of growth in booms and contracts at twice the speed of growth in recessions. Global revenue passenger kilometers (RPK) slowed in the 1980-2 recession, but declined in the following 35 years only in two recessions: 1991 and the 9/11 terror attack. There was a structural change after the oil shocks of the 1980's; long term growth slowed from 3.8% a year to 3.3% a year. Why aviation got it wrong As late as December, IATA was forecasting a 2% fall in 2009 but growth of 4% in 2011. IATA's economists realized that recent growth was driven by credit, yet they continued to watch the real economy rather than the credit crunch. They thought perhaps that a reduction in capacity would suffice: " Many analysts in the US are suggesting that planned capacity cuts will tighten supply-demand conditions for US outlines in 2009 to the extent that they could raise yields and make profits, despite the recession". Again, " load factors are likely to hold up better in this downturn than in the past, because of the pre-emptive cuts in capacity". A 5% fall of global freight was expected in 2009. The trend has weakened since 1997 due to fuel costs and the increased efficiency of sea transport. IATA's December 2008 briefing is interesting because its authors were alert, and expecting trouble, but not getting mugged. It expected recovery in 2009 after a 3% total fall in air traffic. The precedent for the impact of recession was a fall in air traffic by 2.6% in 1991. traffic growth took time to recover, but IATA expected growth to return to 4% in 2011. It expected air cargo to return to 6% growth in 2010. Reality strikes Giovanni Bisignani, IATA CEO, admits the "industry is in a global crisis and we have not yet seen the bottom". Alarms bells are ringing everywhere with big drops in cargo and passengers (aside from the Middle East). Passenger numbers fell by 5.6% in January on a y-o-y basis, it was 1% worse than December, and was the fifth consecutive month of decline. Asia led the decline with an 8.4% yoy fall. This is severe because Chinese New Year fell in January this but February last year. The largest Asian market is Japan, and a steep fall is expected as economists project a fall of 5% in GDP in 2009. North America carriers had 6.2 less demand in January, led by a decline in Trans-Pacific traffic. Europe is also a disaster. The Middle East alone had positive growth(3%). Cargo fell much more than passenger traffic. Significantly for New Zealand, Asia-Pacific carriers fell by a massive 28%, rather more than Europe, -23% and American ,-19%. January is still better than December, but no recovery is envisaged yet as manufacturers shed inventory and slash production. Fuel prices are lower, but revenues for the industry are down by US435 billion. Carriers are cutting flights. Latest Outlook IATA is now very worried. Cargo revenues are only 10% of total airline sales, but represent 30% of tonne-kilometres flown. A fall in cargo hurts profitability because wide bodied jets cannot fill their holds with passengers. The IATA data interests me because the Asia-Pacific region is suffering the greatest decline in passengers and freight volumes which were down 8.4% and 28.1% yoy in January. The implication is that these export-driven economies are suffering much more than the IMF, World Bank etc let on. Airlines are very adaptive. They thought the recession was shallow, so they cut capacity by 1.5% in December and 2% in January. But the cuts failed to keep pace with the fall in demand. US airlines were quick to cut capacity. Reaction was slower elsewhere: in Europe because there is a danger of losing slots at congested airports if they are not used, while Asian and middle Eastern airlines have a substantial number of new planes. Profits International airlines suffered in 2008 when jet fuel rose from $US$90 to US$180 a barrel. Profitability fell sharply in the US because its airlines had not hedged against increasing spot oil prices. The same airlines are now looking better as oil prices have collapsed. Nevertheless, the US airlines made the bulk of the industry's losses for a while, but other airlines were not unscathed, and European and Japanese airlines made losses as the global recession hit them early. Jet fuel has fallen to $60 p.b. but most airlines are locked in by hedges at a higher price. The industry expects to lose $5 billion this year. The stock market agrees, for the value of airlines has halved in the year. Conclusion Air industry revenue is an excellent bellwether of the economy. Its sharp fall indicates the on-going viciousness of the current global recession. That Asia, and Asia-Pacific is the worst affected region will disappoint many analysts who touchingly expect the region the pull the world out of recession. PS Dr. Bollard told the job summit that the crunch ate 40% of the world's wealth. My readers got that on February 6. "”"”"”"”"”"” * Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared.