2012 will be an interesting year for the aviation sector to say the least. The winners in 2012 will be the Middle East airlines of that make no mistake. But there are many things to watch and prepare for…
In Europe there may well be a little too much to keep track of with legislation and taxation compounding overcapacity, labour, political, currency, funding and fuel price pressures. Airlines in Europe, as mentioned a few months and weeks ago, will not be able to pass on tax increases to the passenger, expect serious woes.
The airlines to watch in 2012 are: Air Malta, who needs a suitor or cash injection fast, TAP as it is prepared for sale, Air Berlin which must get it finances sorted out at speed, and BMi which could end up being consumed by IAG or by Etihad under the thin veil of Virgin Atlantic. The airlines of the Middle East could and should take their chances in 2012 to grab routes within Europe and beyond.
MIDDLE EAST
The Middle Eastern domestic markets have had a tumultuous 2011. 2012 could yet prove far worse. Iran is the big question. Syria falling into civil war may yet suck in Iran that could be the spark for Israel to deal with the nuclear problem. All across the region there seems to be growing religious divides opening up and it is true to say that we could yet see much of the Middle East breakup in the same fashion as Yugoslavia across sectarian divides. This would be a disaster for the region in the short term but would not affect the big carriers such as those of Qatar and the UAE which are stable and fully international in outlook. For the rest of the world’s airlines though it could mean very high fuel costs indeed.
AFRICA
The African region remains dominated by bad press but if you look past the counties that we know to be a terrible risk, you can see Chinese infrastructure projects (as payment for raw materials) are starting to take shape at pace. Africa is a goldmine for aviation business as political stability grows. That said South Africa could see problems as the government tries to cling on to power in 2012 starting with gagging the press.
APAC
In the Asia-Pacific region airlines are seeing business travel slow dramatically while economy-class bookings remain strong…for now. Overcapacity on routes between the European Union and APAC remains a problem that in 2012 may lead to severe pressure on margins so watch out for the likes of Cathay Pacific showing signs of pressure on their main routes.
The Indian economy is slowing and the nation just does not have the infrastructure to keep things moving. Expect to have to reassess the aviation fortunes of India at pace in 2012.
As for China, long term there are cracks showing in the social political fabric of the nation but in 2012 it is the falling away of export markets and territorial waters claims that could affect our industry. Make no mistake that the unfounded claims of the Chinese to waters off Vietnam could cause conflict, add to this the possibility of further instability in North Korea now that their Dear Leader has gone and you can conclude that 2012 will be a telling year for South East Asia development.
Meanwhile we have to mention Qantas. Mr Joyce, the CEO of Qantas has done a great job in 2011 and has put the airline on a very firm footing for 2012, although he knows that he is helping ignite what will be a bitter price war in 2012 – who will blink first?
Kingfisher has been the airline on watch in 2011, the question for 2012 is will it still be around past March? Something has to give too for Air India and Jet Airways. Jet management are very much mistaken if they think they can keep reducing prices on the domestic arm (the only profitable part of the business) without destroying the balance sheet. We have put Jet Airways on watch for 2012 as the airline has been a bit silly (I am being polite) in 2011. Also keep an eye on Scoot and its load factors in its first few months against its main rivals. It might also be time for Airbus and Boeing to consider how safe some of those huge APAC aircraft orders are.
AMERICAS
In the USA the airlines remain in good stead having been managed very well indeed over the past few years. No market is better equipped to deal with another crisis than this.
In South America things are also looking good with consolidation providing scope for airlines to do well. Brazil is indeed the best market for investment but for aviation South America more or less as a whole is looking very up-beat to say the least.
In Canada the going is choppy with Air Canada showing signs of distress. Of all the airlines in North America, Air Canada is the one to watch in 2012, while it will be very interesting indeed to see how JetBlue performs.
THE BLACK STUFF
Oil prices remain the main thing to watch for. Our panel concede that predicting 2012 prices is a very hard call. As mentioned a few weeks ago, what we do know is that if the US economy continues to power ahead then oil prices will only go one way with a 2012 average in the region of $110 pushed up slowly by political instability in many oil producing countries. There could yet be a few spikes in prices during 2012 that will see speculators take profits pushing prices down from any peak at pace. In this instance all suggestions are that peaks in the region of $150 a barrel in 2012 could well be a reality if the Iran situation were to become worse. So to hedge or not to hedge? Well given the information above, the answer would be that any hedge in the region of $90 a barrel or under is a very good thing for 2012 but of course the US economy could yet be dragged down by the EU and the Eurozone and this would increase the rate of slowdown in China and India thus affecting oil prices dramatically – in this scenario an average of $90 is predicted.
There is no doubt that 2012 will prove to be the year that we scraped through or the year when a great deal turned to dust. Boeing and Airbus, after many years of what seems to be a lax approach to airline credit risk, must now come clean on true expectations and worries. The crazy huge orders of the past five years look more than ever to be in doubt. A further shake-up of the export credit market could tip the balance for many airlines to turn an order into a cancellation. We expect the pace of deferrals and cancellations to increase in 2012 from 2011 levels by 20%. If the A4A Vs Ex-Im case goes against Ex-Im then it could open up a cascade of problems.
Tomorrow we look at leasing.