How Is The Economic Downturn Affecting The Airline Industry?

EXECUTIVE SUMMARY

пЃ¶ Stagflation in US economy threatens outlook for the airline industry profitability. US airlines forecasting Q108 losses citing high fuel costs and a potential economic slowdown.

пЃ¶ Other regions of the world will expand such as Asia, Middle East and Latin America.

пЃ¶ Slowdown has already affected some US small-mid cap carriers with the recent onslaught of bankruptcies.

пЃ¶ US majors are better armed to combating the effects of the sharp increase in jet fuel. Cost reduction initiatives have been announced.

пЃ¶ Slowdown in the US economy is expected to accelerate consolidation talks between the majors.

пЃ¶ Cash cushions at most US majors from a profitable 2007 will help them in the short-term. Financial impact of slowdown could be delayed to 2009.

 FAA investigations into major US airlines maintenance practices regarding AD’s were heightened as a result of the increased scrutiny following lapses of compliance.

ANALYSIS

пЃ¶ Stagflation in US economy threatens outlook for the airline industry profitability. US airlines forecasting Q108 losses citing high fuel costs and a potential economic slowdown.

Downturn in Economy

 Profitability for the airline industry adjusted to $4.5B

 US airlines are most exposed to the risks in the business environment.

 US airlines forecast cut to $1.8B net profit in 2008.

 This could turn into a net loss if the economic environment deteriorates further.

Ð'­ If central banks fail to reverse the credit crunch, the outlook could be worse.

Ð'­ US consumer confidence slumped in March to levels consistent with a serious recession

Increase in Jet Fuel Prices

 Record high numbers of $130+/barrel.

 Airlines like Delta only hedged at $90/barrel

 The offset to rising prices during 2004-2007 provided by rising US consumer confidence and travel demand has come to an abrupt end in 2008.

пЃ¶ Other regions of the world will expand such as Asia, Middle East and Latin America. Competition also increasing.

Areas of stronger growth remain

 During the recessions of 1991 and 2001, all major economies and travel markets fell together. Today, some are contracting and some markets are expanding fast

Ð'­ US: 2008 economic growth reduced over past 12 months

Ð'­ Japan: expected to show much weaker growth

Ð'­ Europe: holding up so far

Ð'­ China / Middle East / Latin America: forecasts revised for higher growth despite problems originating in the US

 Airlines with operations diversified across these regions will face much stronger market conditions than those with operations concentrated on US markets

 Stronger economies in Asia should also provide some support for revenues and profitability.

 Aircraft deliveries cycle is out of synch with traffic growth which will lead to excess capacity and downward pressure on yields

 Market liberalization across the North Atlantic and in parts of Asia and Middle East will add to the competitive pressures from the delivery of new aircraft capacity

пЃ¶ Slowdown has already affected some US small-mid cap carriers with the recent onslaught of bankruptcies.

Recent rush of bankrupt carriers

 Frontier / ATA / Skybus / Champion Air / Aloha

 Some experts believe that the older hub-and-spoke airlines and most of the LCCs will survive the weak economic environment and high fuel prices over the next two years, though with not much room to spare

 Some analysts say larger airlines such as Northwest and United can weather high fuel prices better because more of their fleet is already paid for. Also, parts of their fleet can be parked very cheaply.

 Frontier says the filing is the result of “an unexpected