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NEWS Last modified on December 22, 2011

Shock to the system

How do global crises effect route development in the long-term? Rob Shaw and Joanna Botcherby analyse their effects.

How do global crises effect route development in the long-term? Rob Shaw and Joanna Botcherby analyse their effects.

We've all seen the impact that a world event has on airlines and airports – flights diverted or cancelled, passengers stranded, and schedules in disarray. The short-term media impact is often huge but what is the real impact on airline capacity, especially over the longer term?

OAG Market Intelligence has examined 15 events or 'shocks' WHERE `id` = resulting from natural disasters, health scares or terrorist attacks, which attracted global media coverage over the past 20 years.

Analysis of these events uncovers what type of crisis has an enduring impact for airlines and whether parallels can be drawn from financial shocks and energy crises.

Our analysis has shown that each of the fifteen events we examined generally falls into one of three categories:

• High Impact events are global in scale and recovery of airline capacity takes one to three years. All major carriers are affected due to the sharp reduction in air travel demand; capacity is drastically reduced in order to maintain profitability.
Examples: Global financial shocks, World Trade Center (WTC) Attacks

• Medium Impact events often occur in multiple locations, such as the spread of a virus or an extreme natural disaster, and it takes three to 12 months for capacity to recover. National carriers or major carriers into that country/city are affected while other non-domicile carriers may reduce capacity or frequency of operations in the short-term while the recovery takes place.
Examples: SARS, March 2012 Japanese earthquake and resulting tsunami

• Low Impact events are localised and usually associated with single events within a country, such as an earthquake, and the effect on airline capacity is often short-lived, up to three months.
Examples: tropical storms, earthquakes

The 15 events have each been classified in this way.

Over the past 20 years the only 'shock' that had a widespread and enduring impact on airline capacity was the World Trade Center attacks of September 2001.

The Crisis Analysis Chart shows clearly that this was the only event which dramatically changed airline capacity and that it took three years for capacity to return to pre-event levels.

However, airline traffic trends changed in more ways than just in terms of capacity at 9/11. Prior to the World Trade Center attacks, world airline capacity had been increasing at a rate of 3.1% per year but since then capacity has grown more cautiously, at an average of 2.6% per year. It also appears that there has been greater seasonal variation.

Do rising fuel prices affect capacity in the same way?
The jet fuel price has been rising steadily for ten years, with the occasional sharp spike in price, and jet fuel now accounts for approximately 30% of some airline costs.

But does the rising fuel price affect overall airline capacity? Comparison of jet fuel prices and worldwide capacity appear to show no correlation; capacity does not follow the ups and downs of the fuel price and so there is no clear capacity response to short-term changes in fuel price.

However, the softening of long-term capacity growth, to 2.6% per annum, does appear to coincide with the long-term upward trend in jet fuel prices.

Estimating capacity recovery following the banking crisis
Previous financial crises, such as the Asian financial crisis of 1997, can be classified as Low Impact events in terms of their effect on overall airline capacity. But what about the current financial situation after the banking crisis of 2009?`

Analysis shows this is the second High Impact event in 20 years. Comparison of global GDP trends with airline capacity trends shows that the effect has already been sustained over two years and so it may be many months before airline capacity shows signs of full recovery.

Summary
In summary, global airline capacity growth is very resilient. Regionalised events such as natural disasters, conflicts and fuel price spikes often have a limited impact on capacity.

There have only been two global events in the past 20 years that have had a large enough impact to stem growth for a significant period of time. One was the World Trade Center attack of 2001 and the other is the fallout of the 2009 banking crisis, which is still playing out in global economies and the schedule planning departments of the world's airlines. 





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