24 December 2008

The Professor’s 2008 Closing Blogs Part 1

For our annual 2008 review we are going to do a three parter. In part one we will examine the world order and its potential impact. In part 2 we will look at some specific cases. In part 3 we will look forward to 2009.

Part 1 The world at large.

As Michele MacDonald describes it – this has definitely been an Annus horribilis
The meltdown occurred despite our best efforts to find ways around, through and over it. The market impact is global. This marks the world’s first global recession. We are all in uncharted territory here. As far as travel is concerned we have seen the impact start with softening in the US market and it spread worldwide. I don’t think we can point a finger at a single element – it is a combination of factors that culminates with the inevitability of gravity – what goes up must come down. Yields, Load Factors, Gross Revenues, Employment etc etc are ALL down.

The US market comprising about a third of all worldwide travel transactions saw the good times come to a halt pretty quickly. The sub-prime market mess spread and brought down almost everything in its wake. In hindsight that was the symptom – the result of individual greed, lying – grand larceny even and a laissez faire market management by the outgoing Bush Administration. The bellweather Las Vegas market went soft in the first quarter. While we were hearing rosy reports of continuing traffic growth from the Caribbean – the truth was that everyone got nervous and then cut back. Hawaii took a huge hit from losing about 20% of lift with the failures of ATA and Aloha Airlines.

For the rest of the Americas – only LATAM shows growth. It is still digging out from its own Armageddon in the late 1990s and early ‘oughts. So this is in reality only a correction – positive of course – to where they should have been. I don’t want to however downplay their own success at creating and stimulating demand. More power to them. Mexico’s Tourism has taken a big hit from the failure of 4 airlines in 2008 and in the reduction of the traffic from north of the border from traditional markets. The impact on Chavez’s Venezuela from the collapse of oil will be catastrophic. One positive element might be the future of a brighter and more realistic relationship between Cuba and the USA.

Europe’s travails was a continued shift from the legacy business models to the lower cost and more dynamic sectors. But traffic fell early. How can we forget the disastrous T5 opening at LHR. Clearly some profited from this situation – Lufthansa took the opportunity to open its piggy bank by taking stakes in JetBlue, Brussels Airlines, German Wings, Austrian and finally BMI. The housing market in the UK fell apart with the failure of Northern Rock. People stopped travelling when they realized they didn’t really have any money. Wholesale axing of programs from Northern Europe spread its impact from Thailand to Trinidad as we saw first the Biz Class carriers fail and then XL Airways and Sterling collapse. No sector nor segment of the market was immune.

Russia – a class of its own is now in trouble. The loss of the commodities prices has slammed Russia very hard. The Oligarchs are suffering and trying to dig out behind now massive debts that will have a major impact on the world credit markets. Travel in Russia is slowing and the failure of a third force (Air Union) is clearly going to ripple out ad the transportation market consolidates. However the private airlines – Transaero and S7 are not necessarily in great shape either.

The Middle East bubble has burst. But Shhh don’t tell anyone yet. First inflation slammed the market with rates as high as 23 % in some countries. On average the region has seen inflation steady in the teens. The crash in the price of oil won’t hurt too much as the average price of the precious fossil fuel was still above 2007’s rate. But wow betide the 2009 year. The price of oil will not rise significantly. At its current spot price in the 30s for a barrel – we can only expect to see moderating gains. We may not get back to the $80/ppl that Boeing thinks should be the moderated price. For UAE – the building boom must end and the market needs to catch up with the supply. Housing prices are staying still for now but are headed in 2009 for a big drop. I can foresee a degree of panic occurring. The continuing growth cycle being driven by the various governments with their massive projects will benefit and stabilize the region but it will take a while for the equilibrium to prevail. Build it and they will come is not a good strategy.

Africa – well its Africa so no real change there. Unrest and lack of mature government controls will continue to dog the markets. Zimbabwe continues its slide into Oblivion. The once beautiful and among the most prosperous countries on the continent is perhaps the symbol and example of all that besets the region. South Africa will continue its march to a stable state and the benefits of Kulula and 1Time will continue to drive opportunity.

In Asia the optimism from the beginning of the year has given way to mass pessimism.

India’s powerhouse growth came to a grinding halt with first high oil prices and then the psychological blow of the Mumbai bombings has evaporated all sense of well being. The airlines have slashed services and all are struggling and looking for handouts. Massive layoffs of skilled workers from the outsource companies is opaque to the outside world – but believe me they are there. This is cutting discretionary income at a time when the market was reaching some good growth stats.

China’s ill timed controls on the market for the Olympics resulted in at best a dud. The controls have indeed stunted the stellar growth, with the end of the year seeing the central Beijing Government passing handouts to the major carriers. With traffic constrained to Macau – the only bright spot is the Trans-Straits traffic to the “rebel” province of Taiwan. However the impact on Hong Kong and Cathay Pacific is being felt.

For the rest of Asia things are looking bad. Thailand has taken a huge hit. Even in October hoteliers were bemoaning the loss of the traditional European charter market that has just evaporated. The civil and political unrest has resulted in empty hotels the length and breadth of the Kingdom. Elsewhere – countries whose tourism is feeding from the trough of China are experiencing significant softness. Perhaps China should consider reinstating the 3rd Golden week. Australia is doing OK but the turmoil among the airlines will continue for some time.

2008 will go down in history as a turning point and not just a temporary one. I believe we will wake up in a few years time to a world that I believe will be kinder and gentler. Less full of irrational exuberance. Less dependent on growth at all costs. More rational? Nah – who am I kidding…


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