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[EN] A aviação após o crash de 2008


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When Lehman Brothers collapsed 10 years ago, it set in motion a financial crisis that was to have a profound impact on air travel.
The immediate impact was on demand, particularly at the much-prized premium end of the market as corporate travellers in general, and those from the financial community in particular, saw travel budgets cut.
Traffic would come back relatively quickly, though some of it in lower-yielding segments. But the longer-term impact was felt in financial markets, liquidity and the implementation of austerity measures, the effects of which are still evident today.
Greece, for example, only in August finally exited the international bailout programme implemented to help it during the eurozone crisis, itself a product of the financial crash.
These continuing financial concerns not only impacted travel in a number of markets, but also some airlines’ ability to ride out the storm. Two of Europe’s stuttering carriers, Hungarian carrier Malev and Spanair, fell within a week of each other in early 2012.
For a sector already struggling with high fuel prices, the combination of the sharp drop in air travel demand and plummeting oil prices – and the related hit on settling hedges – quickly translated into heavy financial losses for airlines. IATA figures show collective industry losses of $26 billion in 2008.
That figure was heavily impacted by US airline losses. Delta Air Lines, United Airlines, US Airways and American Airlines between them posted net losses of more than $18 billion. Notably, 11 airline groups posted net losses in excess of $1 billion in 2008 – and none made profits of that magnitude.
While another year of losses was to follow, these years in the red were followed by the most profitable run in airline history. Fortunes had changed so much that in 2017, 16 airline groups recorded net profits in excess of $1 billion and only one – restructuring Etihad Airways – incurred a loss of the same magnitude. And US carriers now lead profitability, with Delta, Southwest, United and American collectively posting net profits of $11 billion last year.
The fluctuating oil price, the initial first sharp drop in which had begun before the financial crisis took place, has been a central part of that rosy financial picture. High fuel costs helped provide the impetus for airlines – notably in the USA – to pursue much of the consolidation and capacity restraint that has driven improved profitability. Likewise, the unexpected fall in oil prices in the second half of 2014 provided a timely respite where airline costs were concerned.
Such has been the turnaround among US carriers that American Airlines chief Doug Parker a year ago said: “I don’t think we’re ever going to lose money again. This is an airline and an industry that will be profitable in good and bad years.” Asked about that confidence during an interview with FlightGlobal earlier this year, Parker first joked that he did say “think” in his comments but then explained that income did not fall to negative territory if you considered American’s current income and how much earnings had fallen during past recessions.
“I do believe the industry has been transformed fundamentally and structurally in a way that it’s a real business now,” said Parker. “There are lots of companies and businesses that don’t lose money ever; it’s just the airline business did it every other year. That’s why it’s a controversial statement.”
His comments were backed by IAG chief executive Willie Walsh, speaking at the A4E Aviation Summit in March. “From an industry perspective, yes, I think he’s right. Particularly if you’re Doug Parker in the USA with the consolidation that they’ve had.”
The one caveat for Walsh was that “the only people that will make that untrue are the people running the airlines themselves”. He cites carriers that have pursued growth “without any understanding” of whether their strategy was sustainable.
But he argues industry has changed. “This is the best I’ve seen it, and I think 2018 will be better than 2017, and I think 2019 will be better again… because you’ve got a different style of leadership… and the poor performers are disappearing. The capacity is being provided by the people who are efficient.”
A more controlled approach to capacity from airlines is credited with much of the improved performance. But airlines, on a global basis, have still been sharply increasing capacity over this period. The key difference has been improved utilisation – passenger load factor this year will be more than five percentage points higher than at the end of 2008.
In terms of the global picture, FlightGlobal schedules data shows the first 12 months after the financial collapse as the only year in which airlines pulled back capacity. Airlines cut global seat capacity 2% across the 12 months ended September 2009.



Airlines were back in growth the following year, surpassing previous levels of global capacity in the following 12 months – at least in terms of seats and ASKs, though not flights. This illustrates the increased focus on utilisation and improving load factors.
For some, the impact of the financial crisis resulted in a delayed effect. Airlines actually lifted capacity to Greece, which suffered so badly at the hands of the ensuing eurozone crisis in the year immediately after the Lehman Brothers collapse. But Greek capacity stalled and subsequently slumped over the next four years – and it was not until the 12 months ending September 2015 that capacity sustainably passed 2008 levels.
But overall, the unprecedented length of the positive economic cycle – or at least its mix of highs, the benign and a few big lows – the lower oil price environment, and airline efficiencies have helped drive a period of remarkable traffic growth.
This means the ground lost by the financial crisis appears to have been made up. Airlines have increased seat capacity 58% since September 2008, FlightGlobal schedules data shows, while IATA projects passenger numbers will reach 4.36 billion this year – up from 2.49 billion in 2008.
This, together with record high load factors and continued cost initiatives, has helped diminish, though not eradicate, concerns around whether air travel demand is in line with planned aircraft orders and deliveries.
Eyes will remain on when this current economic cycle will end and whether it will be another shock at its root or something more gradual.
But in the nearer term, it is the continued climbing price of oil – such a key contributory factor in the airline story of the last 10 years – which is having the biggest influence on carriers’ fortunes.
How a global crisis unfolded
It was 10 years ago that bank executives and regulators began untangling a web of sub-prime lending and complex financial instruments like derivatives, credit default swaps and collateralised debt obligations. These esoteric financial instruments contributed to a crisis that threatened to take down the global banking system.
Like dominoes, banks began to tumble. Freddie Mae and Fannie Mac were nationalised on 7 September 2008; Merrill Lynch was sold to Bank of America on 14 September, and – in underlining the scale of the problem – Lehman Brothers filed for bankruptcy on 15 September.
US mega-insurer AIG, then owner of the second-largest aircraft lessor in the world, ILFC, found itself at the centre of the liquidity crisis. Deemed “too big to fail”, it required a $185 billion lifeline from the government in the form of bailouts.
Within the month, the S&P 500 had lost 30% in market value and the US Congress had approved the $700 billion Troubled Asset Relief Program (TARP) to purchase failing bank assets.
No industry was spared, including aviation. IATA said the downturn in the aftermath of the financial crisis was “the deepest experienced by the commercial airline industry since the 1930s”, adding that “early 2009 marked the low point for international air travel markets”.
Premium travel fell 25% while economy bookings dropped by 9%, according to IATA figures. Airline revenues were slashed by $85 billion – or 15% – representing “a two- to three-year backward step for the industry”, IATA stated at the time.


Changing models: how and where airlines have lifted capacity
While the financial crisis resulted in an immediate sharp drop in air travel demand , prompting airlines to trim capacity, it was not long before they returned to growth.
Within two years capacity was back on the rise and, with some occasional blips around the globe, has kept growing since.
Ever-expanding low-cost carriers – both in size and geographic penetration – have been behind much of this capacity. FlightGlobal schedules data shows the extent to which the budget sector has driven the last decade of growth.
While mainline carriers still comprise the majority of seats and have continued to raise their capacity over the period, low-cost operators have more than doubled the number of seats they have in the market since the start of the financial crisis 10 years ago.
This is particularly evident within the European short-haul market. Here, perhaps more than any other region, low-cost carriers have driven the growth. Peak season seats on intra-European routes have increased almost 50% since summer 2008, the vast majority of which having been added by Europe’s low-cost operators.
That is also behind the notable spike in seasonality over the past decade among intra-European capacity. While there has been an increase of almost 35 million monthly seats during the summer peak on European routes, this increase falls to around 25 million during the winter months.
This, together with the better year-round yields, illustrates why Europe’s low-cost carriers are keen to expand their foothold in non-leisure markets.
A look at seat capacity within the North American market illustrates the extent to which capacity was kept in check by mainline carriers during the years of consolidation. Seat capacity among the majors, on intra-North American flights only moved above 2008 levels this year – in part reflecting United Airlines’ more expansive strategy.
The most startling growth in capacity has been driven from Asia-Pacific. Seat capacity within the region has more than doubled since the financial crisis – with strong growth reported across mainline, low-cost and regional airline sectors.
The growth in Asian markets – and in particular China – is even more evident in the development of long-haul capacity over the past decade. Airlines have trebled the number of seats since 2008 on long-haul routes from China.
That is by a distance the sharpest growth of all countries during that period – and puts it behind only the USA and the UK in terms of the biggest long-haul markets by seat capacity. Much of that has been driven by the international expansion of Chinese carriers.
Interestingly, there has been relatively little growth over the past 10 years in long-haul seat capacity in another major Asia-Pacific growth market – India. Long-haul seat capacity – which was roughly on a par with that of China in 2008 – has only in the past two years increased beyond those 2008 levels.
Airlines have lifted long-haul seat capacity from the UAE – even when excluding routes to Europe and Southeast Asia – at the second-fastest rate over the past 10 years. This reflects the rapid expansion of the big-three Gulf carriers in particular.
But more recent challenges at these carriers and some long-haul markets for these operators – notably the USA – have caused that growth rate to plateau in the past two years.
Mind the gap: how industry moved to keep funding deliveries
The liquidity crunch left many wondering who or what could fill the “funding gap” left by banks and lessors in crisis.
During the darkest days of the recession in 2009, Airbus and Boeing delivered nearly 950 new aircraft, Flight Fleets Analyzer shows. “The liquidity crisis put the fear of God into airline CFOs,” one Wall Street analyst tells FlightGlobal. “It was a reminder that the economy can turn quickly and you need to be ready.”
In the aftermath of the 11 September terrorist attacks, the airline industry endured a drop-off in passenger demand and faced major operational changes and associated costs. During that recession, those airlines that survived learned the necessity of having liquidity cushions.
“From our perspective, while the financial crisis was bad, it was not nearly as impactful as 9/11,” says United Airlines’ chief financial officer Gerry Laderman, then senior vice president and treasurer at its future merger partner Continental Airlines. “For better or worse, we made sure after 9/11 that we would be prepared for whatever kind of crisis hit.”
Laderman says Continental had enough liquidity to withstand the shock of the crisis, and this helped the company survive while capital markets were closed.
For US carriers, when the capital markets reopened in 2009, they were able to issue bonds to fund equipment – but they came at a price. United, Continental, Delta Air Lines and American Airlines all issued secured bonds in 2009 between 7.75% and 10.4%. In most cases, the cost of secured money dropped quickly by 2010, with deals issued at more stable coupons, between 6% and 8%.
European banks, which had established themselves as the primary providers of commercial aircraft loans, continued to lend – but at a higher cost.
“We were very active because of the shutdown in US capital markets and the slowdown of US banks in lending long-term aircraft financing,” says one banker then employed by a European financial institution.
IATA reports that in 2009 airlines’ average cost of capital was 12%, well above its normal 7-8%.
A Boeing Capital chart shows that export credit increased from a low point in 2008 to reach a peak in 2012. Between 2009 and 2012, the USA Export-Import Bank approved nearly $40 billion in funding for large commercial aircraft, according to the body’s annual reports.
As the need for export credit increased, the product was refined to become more efficient. The advent of the Ex-Im guaranteed bond – the first of which funded two 777s for Emirates – allowed borrowers to tap capital markets for multiple aircraft and have the deal underwritten by the full faith and credit of the USA. This was later replicated by the European export credit agencies.


Parentage and paralysis: how aircraft lessors were hit by the crisis
Arguably, the worst pain inflicted on any one constituency by the financial crisis was on the leasing companies – and some felt it more than others.
On the equity side, the listed aircraft leasing companies suffered, with AerCap losing about 85% of its market value and Aircastle about 75%.
The paralysis in the credit markets was one of the biggest hurdles to overcome for aircraft lessors. With shareholders AIG and Royal Bank of Scotland in trouble, ILFC and RBS Aviation Capital were facing uncertain futures.
Both lessors had large orderbooks with Airbus and Boeing, and therefore had large capital needs. But raising debt became increasingly difficult, especially in the capital markets.
As ILFC grew, it ordered more and more aircraft. The company funded this expansion in large part through the commercial paper market, relying on the investment-grade “halo” of its parent. As the markets melted down in the autumn of 2008, however, ILFC could no long access this market.
On the other hand, RBS Aviation simply suffered at the hands of its parent. After taking over Dutch bank ABN Amro, which made it the largest bank in the world, Royal Bank of Scotland also needed a bailout from the British government as the crisis bit.
Like ILFC, RBS Aviation’s business was itself sound, but its shareholder was under pressure to divest non-core assets as it refocused under the direction of its new shareholder – the government. The result was that both lessors were paralysed.
“I don’t think people really appreciated how big the problem was until the nationalisation of RBS,” says Peter Barrett, SMBC Aviation Capital’s chief executive and RBS Aviation Capital’s chief executive through the crisis.
“That really came as a blow to the solar plexus because RBS had become the biggest bank in the world, and then had effectively become a ward of the state.”
Reflecting on that tough period just after RBS’s nationalisation, Barrett says he wishes he’d been able to pick up more assets. “There was so much opportunity on the buy-side in 2009 and 2010, but we didn’t have the capital.
“One of the of the largest lessons we’ve taken from this experience is that you have to plan for the downturn not just on the asset side but on the liability side, and make sure you’re well capitalised and have access to funds so when opportunities present themselves, you can take advantage of them,” Barrett says.
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