Euler Hermes


Economic Outlook n° 1188 | Special Report | Transport: a two-speedworld


Converging amidst differences 130 120 110 100 90 80


Significant sensitivity of thebusiness activity to the economic environment index basis 100=2007


Passengers Cargo


07 08 09 Source: IATA, EulerHermes 10 11 12e


▶ The air transport sector isparticular exposedto climate change at either the global or regional level. IInthese circumstances, air traffic isnaturally the first component to be affected, but prices also drive the changes because capacities inair transport are not as flexible as they are inother services activities and are sometimes out of synchwithneeds (excess capacity relative to demand→deflationary pressure onprices / capacity shortfall→inflationary pressure onprices) In2012, the de-coupling betweenpassenger and cargo revenueswasmainly due to contrary air traffic trends.Acomparisonof the 2012 figures reveals this contrast, as passenger trafficwasup a


robust 5.7%while cargo volumewas down1.9%. Passenger traffic benefited fromthe vitality of international (+6.4%) and domestic (+4.4%) traffics, due to the 2012 global economic growthand the ongoing economic boom inemerging regions (Asia and SouthAmerica).Meanwhile, cargo suffered fromthe difficulties encountered inthe euro zone,whichdisrupted twomajor cargo routes. For 2012, prices also trended inopposite directions (a first since 2001),witha roughly 2.5%increase for passenger air travel and anapproximately -2%decline for cargo. This deflationary trend for cargo resulted fromamismatchinsupply and demand, as capacity remained stable (+0.7%) while cargo traffic declined (see slide 12 / -1.9%). The segmenthas confirmed some rigidity incapacity cuts.


▶ Major strategicmaneuvers in air transport in 2012


> Two initiatives thatwould have been unthinkable up until recently for legacy carriers occurred this year:


• setting up or reinforcement of their own low- cost service to stop the bleeding caused by current low-cost operators on short- and medium-haul flights. These trends are particularly evident among Asian and European carriers. • tie-ups as part of alliances or code-sharing agreementswith Gulf carriers in order to integrate theminto a synergistic and not solely conflictual approach.


> Alongwith the othermeasures, for 2013 and beyond, the emphasismay be placed on restructuring the sector through direct equity investments, either involving acquisitions of companies facing serious difficulties (TAP, LOT, SAS, etc.) or potential progress on the establishment of truly globalized companies, thereby paving theway toward the “normalization” of global air transport.


A look at the world’s variousmarkets in 2012 (based on EH sample):


▶ UnitedStates In2012, the legacyU.S. carrierspursueda strategywhich hasbeenbroadly adoptedsince the crisis andaims to maintainprofitablepricingthroughstrict controlof capacity (stable this year),givingthe carriersgenuine pricingpower andthe ability topassonincreasedcosts so as todeflect risingfuelprices (ahighlydetrimental factor, giventhe relatively inefficientU.S. aircraft fleet).The ability tosetpriceshasbeensomewhat eroded, as they roseby6%inthe firsthalfof2012after8%in2011, perhaps signalingthe initial limits tothis strategy should the economic climatebegintodeteriorate.Withanet averagemarginofmore than2%(excludingAMR restructuringcosts),2012resultsbenefit fromthe comparisonwith2011,whichwasnegatively affectedby losses atAMR/AmericanAirlines.Any improvement in 2013willbe largelydue tothe recognitionof that company’s turnaround. ▶ Europe The slowingrateof increase inair trafficobservedinthe firsthalf (4%this year comparedwith7%in2011) reflects thedeteriorationinthe Europeaneconomy.Carrierswere not able torelyonthepremiumsegment,whichhad beena sourceofhighermargins inthepastbutwas flat duringthisperiod.However, a trendshiftby the legacy


20


Europeancarriersoccurredin2012,withgreater restraint inthe market share chasingandgreater controlover capacity inorder to gainmorepricingpower.This strategy,whichhada tangible impact inthe firsthalfof2012(witha4%increase,upfroma modest2%increase in2011) andechoes the strategy adoptedby U.S. carriers toachieve a turnaround,neverthelessoccurs ina muchmore competitive environment,whichlimits itsoverall impact. In2012, the strategywillhavebeeninsufficient inany case, giventhe strongpressures exertedby fuelprices aswell as the more sluggishmarketgrowth, andthe sectorwill endupwitha loss.The cost-cuttingmeasures initiatedthis yearhavenot yethad muchof animpact,but shouldenable these companies to breakevenin2013. ▶ Asia(exChina) The legacyAsian(exChina) carriersbenefitedfromamore favorable economic environment andtherefore recordedmore sustainedgrowthintraffic (+8%).However, thebattle against local low-cost carriers togainapieceof thepie is fierce, andthis robust competitionweighedonprices (nearly stagnant), evenas fuel- relatedcostpressures remainedsubstantial.Cargoactivitywashit veryhardby the slowdowninexchangeswithEurope.As a result, theseheadwinds ledtothe erosionofhalfof thenetmarginsof Asianlegacy carriers. For2013,we expect themtoadjust the scope of their activities inorder toenable a slight improvement in performance.


▶ China The traditionalChinese carriers ensuregenerallyhighprofitability by takingadvantageof the substantialgrowthindomestic air travel inanoverall favorable environment. In2012, this steady businesshas tendedtoerode, as the surge innewcapacity in recent years (+8%inthe firsthalf),whichis slightlyoutof synch withdemandin2012(+7%),put somepressureonprices in2012 (+2%inthe firsthalfof2012comparedwith+7%in2011).As fuel costs continuedtotake their toll, the reducedability topasson fuelprice increases toconsumersnegatively affectedthe profitabilityof theChinese carriers,whichthus fellby30%in2012 Thenetmarginlevels are expectedtoremainunchangednext year,makingChinese air transport amajor sourceofprofitability inworldwide air transport.▣


Averagenetmarginof traditional carriers %of sales


United States Europe


Asia (ex China) China


2011 -1.0% 0.4% 4.0% 6.3%


2012e +2.2%* -0.5% 2.0% 4.5%


Source : EulerHermes sample * excluding AMR/ American Airlines restructuring cost


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