Airlines: Grounded for good?

Fears of a flu pandemic could not have come at a worse time for the global airline industry. Sarah Arnott reports

Global air traffic was down by more than 11 per cent in March and cargo by 21 per cent, the International Air Transport Association (Iata) said yesterday, as fears of a swine flu pandemic added to the aviation industry's woes.

A global health scare is the last thing the sector needs. More than 30 carriers have already gone out of business in the past 12 months, hit by the combination of sky-high oil prices – up to an unprecedented $147 per barrel last July – and falling demand as recession bites across the world.

Giovanni Bisignani, the director- general of Iata, said: "It is still too early to judge what the impact of swine flu will be on the bottom line. But it is sure that anything that shakes the confidence of passengers has a negative impact on the business. And the timing could not be worse given all of the other economic problems airlines are facing."

So far, it is carriers in Asia Pacific that are being hit hardest by the recession, according to Iata. Some 14.5 per cent fewer passengers flew in March, outstripping even the airlines' 9.3 per cent capacity reduction. In the US, international traffic dropped by 13.4 per cent; in Europe by 11.6 per cent – in both cases dragged down by rising unemployment. The only positive is that cargo levels – though woeful – may have stopped falling, having hovered between 21 per cent and 24 per cent down for the last four consecutive months.

Mr Bisignani said: "The global economic crisis continues to reduce demand for international air travel. All of this is hitting revenues hard. The only glimmer of hope is that cargo demand has stabilised. It's not the end of the recession, but we may have found the floor."

Yesterday's numbers from Iata are a gloomy global confirmation of the picture painted by UK industry statistics. BAA, the airport operator, saw traffic through its seven airports drop by 11.3 per cent in March. Nearly 18 per cent fewer people flew from Gatwick, 16 per cent fewer from Stansted and 13 per cent fewer from Glasgow. Transatlantic traffic fell by 18 per cent, European charter traffic was down by 31 per cent. British Airways saw premium traffic down by 13 per cent year on year last month, and non-premium down by 6 per cent, and is warning of a £150m loss in the year to March.

For small, undercapitalised carriers, already only just hanging on, swine flu could be the final nail in the coffin – not least because of the credit issues already bedevilling businesses of all types. But even the major airlines are not immune, and it is the international giants that would be most exposed to a major health scare.

The aviation sector has been here before. In 2003, an outbreak of Severe Acute Respiratory Syndrome (Sars) in the Far East sparked global fears of a pandemic. Although it never materialised, airlines from Australia to Canada to Europe – already hurt by the post-dot.com economic downturn and the outbreak of war in Iraq – faced severe difficulties. At the height of the scare, in April and May of 2003, the British Airways Asia Pacific region was down by a whopping 27 per cent and it made a loss of £45m for the quarter.

So far, with fatal cases of swine flu only in Mexico, the commercial impact is relatively contained. Although shares in everything from airlines to travel agents to hotel chains have taken a beating since the virus hit the headlines at the weekend, so long as the outbreak remains localised only companies particularly exposed to the Mexican market are in any danger of collapsing. BA, for example, runs four return flights to Cancun and back every week, but even at top capacity the route carries fewer than 3,000 people – hardly enough to bring it to its knees.

But if the disease spreads across North America, the implications become more serious. Gert Zonneveld, a transport analyst at Panmure Gordon, said: "The biggest risk at the moment isn't to the UK-to-Mexico routes. What people are worried about is that we are already seeing cases popping up in the US. If that accelerates – and people are discouraged from travelling altogether – there will be a much higher impact on carriers such as BA that are heavily exposed to the transatlantic trade."

The only cause for optimism is that crisis is one of the aviation industry's strengths – although the calculation of the total profits for commercial flying since it began in the 1940s records a loss. "Almost every external shock tends to be a bad one for aviation industry – be it war, or foot and mouth, or bird flu, or bomb attacks, or a tsunami, or the oil price," Mr Zonneveld said.

"But airlines have an amazing ability to survive, no matter how hard you knock them, even though the industry as a whole is loss-making. It is a very difficult market to operate in, but at least the companies do have experience of trouble."

Only the low-cost carriers claim to be profiting from recession. Ryanair saw a 5 per cent rise in passengers in March, and says it will fly 67 million passengers this year, more than any other airline.

Michael O'Leary, the famously outspoken chief executive of Ryanair, yesterday predicted annual profits of £60-80m for the financial year just closed, despite having grounded 20 aircraft last winter because of falling demand and high fuel prices. "We are still growing this year at a time when every other airline in the UK is cutting back traffic and capacity," he said. "We are the Ikea or Aldi of air travel. Everyone switches to Ryanair in a recession."

To help cut costs, Ryanair is phasing out airport check-in altogether from this October, saving itself an annual €50m (£45m) by making passengers check in online. It is also considering an extra fee for overweight travellers after 100,000 people voted in favour in an online poll.

Mr O'Leary is as dismissive of swine flu as he is of recession. "It is a tragedy for people in slums in Mexico but the two people with it in Scotland will be out of hospital on Friday with nothing but a runny nose and a tickly cough," he said.