Recession? - I Think not

[RVR800]

Recession? - I Think not

The great summer getaway
1.5m to leave the UK this weekend
13m to go on package holidays this summer
11m to go on independent holidays
30% more holidays taken abroad than in 1996
50% more holidays taken abroad than in 1991

[pj997]

So why are:

- Many airlines reducing the size of the aeroplanes they fly on many routes?
- Many airlines are cancelling routes?
- The number of business class travellers is decreasing, therefore decreasing airline profitability?
- Many companies are forcing their staff to fly in the back, or just banning business travel altogether?
- Many airlines are announcing a decrease in profitability and passenger numbers. KLM recently announced results which were down by 50% over the previous period.


I fly as a passenger with BA to FRA from LHR on a weekly basis... Over the last few months, it is really noticeable that:

1. Smaller planes are being used.
2. Where in the past it was difficult to get a business class booking, it is now easy. What is hard, is to get an economy class ticket.

Remember, the bulk of UK citizens go on holiday during the five week period (starting this Saturday).... What happens in the other 47 weeks is really what makes the difference to the travel and airline industry..

The airline industry is a very prone to movements in the economy, and it is suffering big time at the moment from the global slowdown... Not forgetting a few others such as OPEC keeping fuel prices high, air traffic delays and increased industrial actions, particulary from pilots...

[Ivan Ivanovich]

Whilst I don't think that the great summer get away is any indicator of booming industry, I doubt also that there is an impending recession.

There is bound to be a slow down in growth - companies cannot expect mini booms to be sustainable. But I can't see that this should automatically point to a recession.

As for business class travel? Well, companies have been persuading and forcing their representatives to travel economy for years. Everyday another business travel makes the move towards the rear of the aircraft. It's more about bean counters taking over industry than companies struggling financially.

[RVR800]

II Agree
Rumours of a recession are much eggagerated
and most analysts now concur
e.g. .......

Tuesday 24/07/01
Britain's GlaxoSmithKline, the world's second-biggest pharmaceutical firm, reports a 15% jump in second-quarter profits.

UK department store group Debenhams has revealed strong sales growth in its summer trading statement. It said underlying sales for the 21 weeks to 21 July were up 8.7% - ahead of most analysts expectations

UK internet bank Egg narrows its losses and increased it customer base, insisting it is on track to break even later this year.

US The world's largest oil firm ExxonMobil sets new records by pushing half year profits to $9.43bn

The UK's second largest mortgage bank reports a 15% rise in profits to over one billion pounds for the six months of this year.

25/06/01

Europe's biggest low-cost airline reports record annual profits of 105m euros, with passenger numbers up 35% to 7.4 million. The budget carrier reports record traffic and profits, and reveals plans to become Europe's fourth biggest scheduled airline.

22/05/01

Europe's largest airline British Airways has reported a sharp rise in pre-tax profits for the year from just £5m to £150m.

The media were telling us that fuel was going to break $40 a year ago - Its
now $25 - No News here then

TODAY - Friday
Britain is nowhere near a recession," said Barclays Stockbrokers economist Hilary Cook.

27-07-01
Q2 2001 GROWTH IS 2.1%

NO RECESSION ........

[ 27 July 2001: Message edited by: RVR800 ]

[scroggs]

The British economy's growth rate between April and June this year was just 0.3%, or 1.2% annually. With inflation running at around 2.0%, this is a de-facto recession, even if the figures don't yet reflect that. They probably will.
All the company results out now include figures for the middle and end of last year, a period which saw some of the strongest growth since WW11. It's no surprise that there are many reporting strong profits. But look at their figures for their last reporting quarter and you will see a different story. Add to this the problem, for UK, of a weak Euro, weak Yen and a less-than-full-strength dollar, and you will see that exporting is becoming increasingly difficult for UK industry, but buying imported goods is currently very cheap for UK consumers (this, of course, includes holidays abroad). That means that our industries can't sell strongly to our own people, let alone their foreign markets. The net result is more bad news for many UK companies. Airlines are already feeling the pinch as industry reins in corporate travel budgets, and the holidays market is now so competetive that margins are thin or non-existant. We don't make money from bucket loads of £39 return fares - we make it from the few £500+ business returns.
This isn't technically a recession yet, but don't bet on it not becoming one!

[RVR800]

BBC Today

UK annual GDP growth (%)

Q1 2000: 3.2
Q2 2000: 3.4
Q3 2000: 3.0
Q4 2000: 2.6
Q1 2001: 2.7
Q2 2001: 2.1

Source: ONS

"Britain is nowhere near a recession," said Barclays Stockbrokers economist Hilary Cook.

A lot of pessimists were predicting zero growth in this quarter..

I still say that this industry is gambling on a recession to provide cheap flight crew...

It aint happenning..

[Ivan Ivanovich]

A monthly growth rate below inflation does not indicate a recession and cannot even be termed a recession even in theory. Whenever we in the UK enjoy strong economic growth we then view any slow down as a recession. A recession may be defined as a reduction in economic activity but the word is more generally associated with a collopse in economic activity and that certainly isn't forcast.

Wow! Debating economics on an aviation forum. Who says pilots can't talk about anything else but flying?

[RVR800]

Global and UK Economics..

This is a subject very relevant to pilots especially wannabees some of which are investing in the future only to be told that we are entering a recession..

I am being realistic not pessimistic or
optimistic when I asy thet there is no recession..

A recession by definition is two or more consecutive quarters of economic contraction.

For those of you who came to age in the era of endless economic expansion, this means that the actual value of all the goods and services created in the country will actually be less than the value of what the nation produced in a previous time period.

We are nowhere near this..

[scroggs]

Yes, you're quite right that a recession is two consecutive quarters of 'negative growth'; it's also true that a comparison of headline inflation and GDP growth is neither a theoretical or practical measure of a recession, but it's a valid comparison, nonetheless. As for the anual growth to June 2001 being 2.1%, that's also true, but 1.8% of that was between June 2000 and April 2001. The UK economy's growth is slowing very rapidly, and I now believe that we will be in a technical recession by Christmas unless we are very lucky.
The difference between the 3.0% growth of last summer, and the 1.2% now (0.3% extrapolated) is an enormous drop in confidence. That is already affecting the airline industry and will continue to do so. The fact that consumer spending is currently holding up, and is almost single-handedly propping up the economy, is largely as a result of low interest rates, cheap imported goods and a general feeling that 'unemployment won't happen to me'. The moment that confidence is affected by the lay-offs now beginning, is the moment we face a serious recession. If we all keep spending money we haven't got, we'll all be alright.......!

[piperindian]

there is an article in the current issue of THE ECONOMIST about a recession in the UK industry. Germany is in recession also.
The recession is maybe not full-blown but we aint far. :eek: :eek:

[foghorn]

The old cycles of boom-bust were mainly caused by the high interest rates necessary to calm down a credit-fuelled consumer spending boom, with an accompanying wage-prices inflation spiral.

High interest rates meant companies had diffculty funding expansion, sterling would become overvalued causing exporters to have difficulty exporting. The inflationary boom would cause companies to increase their prices to cover rising wage bills, fuelling the boom.

Eventually this would all turn to bust with profits collapsing and unemployment rising.

This kind of boom hasn't happened this time. Interest rates are low and look likely to stay low. There is no inflationary boom that needs cooling off. Consumer spending, although rising for the last few months, has only risen very slightly from a very low base (ie. summer discounts are not as large this year as before). Interest rates are the lowest for over a generation. Inflation is completely benign, the recent increase was mainly due to fresh vegetables and the weather.

The only worrying factor is the strength of sterling with respect to all world currencies except the US dollar, but this is not a new thing - sterling has been strong for years now and successive reductions in interest rates have made little difference (which means that its value has more to do with the market's perceptions of the good health of the UK economy relative to other countries than interest rates).

All that has really happened is that growth has reduced slightly with a complimentary reduction in earnings growth. Most economists seem to agree that this signifies a 'soft landing': something that everyone has been hoping for - a gentle slowdown of the economy back towards its long-term trend growth rates without a plunge into recession.

The danger is, as ever, that the press talks us into a recession, since they can influence consumer confidence, which is the oil that allows the cogs of the economy to turn.

[ 28 July 2001: Message edited by: foghorn ]

[flypastpastfast]

Just a point, I saw something on daytime telly (nothing better to do)on The Working Lunch, and they described the origins of the definition of recession as two or more quarters of economic contraction as 'made up'

Apparently some US politician 'made it up' to 'prove' the economy was not in recession at the time of an election, and thereby save his career etc..

Ever since then it has been 'adopted' as a definition, but most experts do not rely on it.

Politicians eh?

[scroggs]

Foghorn,
yes, I agree essentially. The difference is that I think the confidence holding it all together is more fragile than you do....!
I also agree that it is unlikely to be a deep or long lasting recession, but it is worrying that all three major economic centres (US, EU and Asia) are slowing at the same time. That makes it difficult for industry to lead us out of the slowdown with exports - even if the pound's strength were reduced. It's going to be an 'interesting' few months, and I think that some serious unemployment is on the way.

[TomPierce]

RVR800. Would you care to revise your opinion on the recession? Now that we are actually in one. Well, at least the manufacturing industry is - "officially". The last recession started at roughly about the same time of the year in 1989.

Scroggs came closest to what the true picture is, or likely to be, and it has to be said that the services industries will almost certainly follow now. This gives real food for thought, because the airline industry has performed in peaks and troughs for the last 30 years or so, at roughly 7 year intervals so it now depends on how much it affects peoples pockets before it affects the airlines. The alliances will survive but the independents will have a real problem, just as they did in 1989.

Recession - you think not! Think on. We are in one and it has yet to gather pace. How much is yet to be determined.

[HomerSimpson]

Then why does the Telegraph today (7th Aug 01) say that the Manufacturing industry is in recession?

[cosmo kramer]

The numbers doesn't make any difference. It's what people believe. If the media and politicians says there will be a recission - there will be! It's a self-perpetuating effect :(

[TomPierce]

The numbers don't make a difference!!!! Do you think the manufacturing industry would like to know that? Perhaps you should try telling them - I am sure you would be very interested in their reply :mad:

Wouldn't it be wonderful if such a comment could REALLY blow away a WHOLE recession. Perhaps RVR800 was right then - NOT.

[cosmo kramer]

No reason to become upset Tom. I think you misunderstood it anyway.

[cosmo kramer]

InFinRetirement (I assume you are the same person as TomPierce), maybe it was the " :mad: " ;)

Let me elaborate. If people thinks there will be a recession they will be scared and stop investing etc. The media will report the company a and b is now slowing down and it could be a sign of recession. Then company c and d will slow down too and Ms Smith and Mr Johnson will not buy a new car or whatever. The media will now... and company e and d and Mr Bush etc will ...

Get what I meant now? ;)

[scroggs]

I think we have already been overtaken by events. While consumer confidence remains bullish, the overall industry (whether manufacturing or service) outlook is going through the floor, faster than almost vever before. The US layoff figures show the fastest ever 1-month rise, and the greatest recorded June rise. Industry - worldwide - is backing off on investment, and allowing marginally profitable lines to die. Non-essential expenses are being cut as far as possible. And Ryanair makes a record Q2 profit - because of all those cutbacks on luxuries by those firms who previously could afford Club on BA.
It may well be exacerbated by media speculation, and the day-trader's (read - gamblers) influence on the world's stockmarkets is now as great as the vast investment conglomerates', but we are most certainly heading into an economic downturn of significant measure. It is likely that, once the markets realise that there ain't too much wrong with the UK and US economies (apart from energy dependence), that things will ease up for them, but Europe and the Far East are in a real mess. Japan has had zero interest rates for some time, and they're still in recession. Europe is hamstrung by the CAP and other ridiculous government spending, and an increasing belief that import tariffs will protect them.
This has a long way to run yet...

[Wee Weasley Welshman]

Well its certainly true that there traditionally is a 10 year cycle which last hit in 1990/1991 so perhaps here we go again...

Scroggs, helmets on and lets double the ration stores in the bunker because the Wannabes forum might soon be swamped... :-(

WWW

[Evo7]

If you'll excuse an outsider to the industry butting in, it seems to me like the problem for the airlines is going to be in business travel. To quote scroggs,



We don't make money from bucket loads of £39 return fares - we make it from the few £500+ business returns.



You pay a hell of a lot more money for a couple of glasses of less-cheap chardonnay and a bit more leg room. 30 seconds on www.british-airways.com (http://www.british-airways.com) got me a quote for £4k :eek: for a 1 week business class return from LHR to ORD. I fly that route regularly in economy (family in Chicago), and I doubt I've ever spent more than £400 for the ticket.

When the travel bill got out of hand at a company I used to work for, they offered us a choice. Business class as before, or Economy and a "subsistence" payment that could be up to £500. That's a taxable benefit, of course, but in effect you got to do whatever you wanted with the money. The prospect of money in your pocket won most times - signing away a hundred quid or more for a bigger seat made people feel they were paying for it...

My point is just that relying on those few £500+ fares seems dangerous to me. You pay a lot more for not much, and the people paying the bills are increasingly aware of that.
Arriving "ready for business" is also a fallacy when it is cheaper to send the staff a day earlier than to buy the ticket. Ultimately if the business class fares just dry up then economy fares will have to go up, but that's just going to drive more people away...

(Edited for UBBcode ineptness)

[ 08 August 2001: Message edited by: Evo7 ]

[InFinRetirement]

Ooops! A boo boo! Bye Tom ;)

Sir Richard stated last weekend that while Virgin were doing good business, "it is time to batten down the hatches" for "the coming recession". Wise talk from a wise man in my view. Wondered why he was unloading a couple of financial business'!

Cosmo has made the point that a recession can be "scare talk" driven. That is a fair point in my view, but when the manufacturing industry goes into recession a huge succession of other industries follow them. In 1990/2 many thousands of business'went under, and a lot more than usual are going now, as we speak, according to Dun and 'Queerstreet's' figures. Bankruptcy's are on the increase too - all signs of a recession on it's way. The fallout will continue long after the recession is over too.

The airline industry - not necessarily the alliances - the independents, will have a tough time as they did 10 years ago. Less people going on holiday and less people travelling. If they have not made hay in the shoulder months April-October, they will have a problem if their reserves fail to sustain them. The low cost operators will almost certainly reap the benefits as cheaper fares are much sought after. The larger carriers, will bear the brunt of the downturn, and the alliances will pick up more business from the travel industry, some of whom will also tumble under the pressure. This will leave a hard cell from the airlines and the travel trade to carry on. No-one daring to put their heads above the parapet until it looks like it's all over. Then the cycle begins all over again. That is how it happened before, so history will more than likely repeat itself.

My two operations flew through two recessions in the 70's and 80's. But only because the core business did not rely on carrying people. But we still had to batten down the hatches.

How long it will last is anybody's guess. There will be guesstimates from the City and everywhere else, from all kinds of so-called pundits. The fact is it will last as long as takes. Simple but true.

[Hannibal Smith]

Bad news for those wannabes about to commence training?

[scroggs]

Evo,
spot on, basically - although I bet your company would never pay £4K for a Chicago ticket! The £500 sweetener for going economy is not uncommon in tight times, but as things improve, the purse strings loosen. The low cost (see Ryanair), and economy-passenger-driven businesses (e.g. Virgin) will survive through this recession, but BA's move upmarket may well prove to have been badly timed.
The big keyword in any competetive business at times like this is costs. If you've the fat to reduce the costs without significantly affecting the product, you'll survive - unless there's just too much fat! Fares just pennies cheaper than the competition's will get those all-important corporate contracts - or, at least, those that survive the push toward video conferencing and other ways of bypassing the need to travel.
The bucket-and-spade industry will have to survive on a significantly reduced market, if the domestic consumer stops spending (no sign of this yet). Inevitably, there will be casaulties. There always are - Air Europe, Dan Air and British Caledonian spring to mind last time round.
The saving grace this time is that inflation, and thus interest rates, are low. This means that companies' debts won't get out of hand as they did in the early '90s, and that reinvestment will come quickly once the bosses feel that the worst is over.
As for jobs, I think that the low-cost carriers (Ryan, EZ, Go, Buzz, etc) will collectively do well, although there may be some rationalisation. Ryanair are looking for 50 737s right now. Their recruiting is bound to contiue strongly - and they have enough money in the bank to ride the rough bits out. Keep the faith, it's not a disaster. But it will be tighter than it has been for a while.

[ 08 August 2001: Message edited by: scroggs ]

[RVR800]

The UK travel operator Airtours gave an upbeat statement about future prospects.

The company said pre-tax profits for the three months to 30 June were £4.2m, in comparison to a loss of £2m in the same period last year.

Summer bookings were up 12% in the UK, while group bookings for the winter are also up 9%.

The company's chairman David Crossland said he was "extremely pleased" with the results.

Some recession...