Demand slow down for the pointy end of the aircraft causing concern

A Report in The Australian by Derek Sadubin, COO of the Centre for Asia-Pacific Aviation says that perhaps you should stow your mini-bar and return your flat beds to the upright position, because there there are worrying signs for the airlines, of a slowdown in worldwide premium travel demand.

The International Air Transport Association reports that premium traffic fell 0.7 per cent in May 2007, the first overall decline since December 2004, continuing the trend, with the exception of March 2007 figures, of slower growth in premium traffic since the start of the year.

The industry body also reports that total international passenger traffic grew more slowly in June 2007 than it had for nine months.

Passenger load factors continued to rise, however, as capacity increased more slowly than demand.

Further economic weakness in the US, a concern that drove Wall Street’s big sell-off last week, could destabilise the global traffic environment, with any signs of a continuation of the slowdown in international passenger demand keenly monitored by airlines, particularly as new aircraft start to deliver en masse.

The association warns that the challenge of managing capacity to increase passenger load factors “will get tougher”.

Over the next 18 months almost 1800 new aircraft will be delivered, equivalent to 10 per cent of the existing international fleet.

The world’s airlines had 38,234 aircraft (international, domestic and regional) in their fleets in July 2007, up almost 4 per cent year-on-year, while the global aircraft order book has swollen 30 per cent in a year to more than 6100.

The Asia-Pacific region had the largest year-on-year fleet increase (up 6.6 per cent) and accounted for about 35 per cent of current orders.

According to the association, the downward trend in premium traffic growth is of concern, given the “strong boost” provided by premium traffic growth to airline revenues and profitability over the past two years.

Any cyclical decline in premium traffic increases the importance of further productivity and cost improvements by airlines to maintain profitability, according to the industry body.

The slowdown is particularly apparent in Europe, with a fall in premium traffic of a massive 10.5 per cent in May 2007, due to “structural”, rather than “cyclical” factors.

This reduction is almost in the same range as that experienced in early 2001, after the tech bubble burst in 2000 and high-fliers stopped spending.

Things are not so bad in this region, with premium traffic on routes between Europe and the Asia-Pacific region, which grew 11 per cent in 2006, increasing only 2.3 per cent in May 2007, while premium traffic growth was also much lower for North Atlantic and trans-Pacific routes than it was at the start of the year, according to the association.

The “weakening influence” of slower global GDP growth, particularly in the US, might finally be working its way into passenger markets.

There was, however, higher growth for premium than economy class traffic on trans-Pacific routes and according to the association, this suggests there “may still be some boost to business-related traffic on these routes as investment and trade links increase” between North America and the Asia-Pacific region.

In addition, with premium traffic already at high levels, the association says slower growth rates may also reflect the “difficulties of achieving further growth on some routes without additions to premium-class capacity”.

Premium capacity growth has been held back by A380 delays for many of the leading business airlines, so that airlines have been able to keep prices up.

Singapore is one market starved of capacity at the pointy end of the aircraft, with Singapore Airlines phasing out some old B747-400s and its smaller B777 fleet is suffering space constraints due to SIA’s introduction of more generously sized premium seats (which were originally meant to debut on the long-delayed A380).

SIA seats just 42 in business on board its B777-300ERs (plus eight in First and 228 in economy) for a total of 278, against Cathay Pacific’s plans for six in first, 57 in business and 238 in economy (for a total of 301).

SIA’s capacity problems should start to ease with the delivery of A380 aircraft from October 2007.

Meanwhile, Qantas has announced a premium economy cabin, to be introduced on B747-400s from February 2008 and in new A380 equipment from August 2008.

Qantas’s premium economy section will displace standard economy seats, in line with the group’s two-brand strategy, to position it at the premium end of the spectrum, leaving Jetstar to handle the budget travel market with its cost structure.

India’s Kingfisher Airlines recently announced its A380s would be “flying palaces” with a meagre 525 seats (against Airbus’s baseline 555-seat configuration for the aircraft).

Qantas plans just 450 seats (14 in first, 72 in business, 32 in its new premium economy cabin and 332 in economy) in its A380s, down from a previously disclosed configuration totalling 501 seats.

The A380 is fast becoming a less-is-more battlefield, with Air France plannning a 540-seat configuration (nine first, 80 business and 451 economy seats), while Emirates plans just 489 seats in its A380s on long-haul routes (Emirates has three configurations planned for its 55 A380s on order). Singapore Airlines now plans “less than 480 seats” in its A380s.

Like the B747 before it, the A380 in its early stages will offer airlines a novelty factor that can translate into higher yield.  Over time, as more A380s are delivered, the rarity advantage will diminish and airlines are expected to configure them with more seats to extract the full benefit of the seat economics the aircraft offers.

Qantas is giving a seat unit cost advantage to its rivals, but is betting on an offsetting effect from its new in-flight product to drive a yield premium.

Some carriers are moving in the opposite direction. United Airlines is actually removing some premium seats on international services to make way for more economy seating across its 97-strong international fleet of B747-400s, B777 and B767s by the end of 2009.

United plans to increase the seating in its B747-400 fleet by 8per cent, or 27 seats while upgrading premium cabins, including lie-flat beds in business class. Like SIA, United’s renovated B767s will have 10 fewer seats overall, because the lie-flat seats take up more space.

Rightsizing cabins is a crucial, but challenging strategic decision for airlines, as they consider changing market and competitive dynamics. If a downturn in the premium market is coming, fewer seats at the pointy end might be a blessing in disguise, allowing them to keep prices high.

For aviation strategic updates, visit www.centreforaviation.com

Report by The Mole