Disruptive events do not change long-term fundamental relationships

Adam Pilarski

Disruptive events do not change long-term fundamental relationships

Adam Pilarski

Disruptive events do not change long-term fundamental relationships

Events such as 9/11 and a potential US-Russia war should not negatively impact aviation in the long term, because it is an industry built on longer-term trends and relationships, writes Adam Pilarksi, Senior Vice-President at AVITAS.

The world is on edge right now. There is the prospect of all-out war in the Middle East focused on Syria, with bombing raids by the US, the UK and France already taken place on targets in that country.  There are strained relations between Russia and the US, which may boil over to military confrontations. There is the real potential of a serious trade war affecting the whole world.  Various world leaders are becoming more obstinate, increasing the chances of serious conflicts between various countries. Any such developments by definition are bad for air traffic. All this makes many of us quite anxious.

In times of higher stress it is useful to remember some long-term relationships that have guided us for many years. Aviation is an industry with predictable and stable relationships between variables going back some time. Some relationships are fairly simple; some are more complicated. As people make more money they want to fly more. As airline tickets become cheaper people also want to fly more. We all know that air traffic, being a luxury product, grows at about double the rate of the rest of the economy. We know that this ratio has been declining over time as the industry matures. We also know that that ratio is higher in less mature markets, hence air traffic is expected to grow less in the US and Europe than in, say, India. We also know that the industry is highly cyclical. We know that as traffic grows and airlines make more money they order more aircraft. There is a fairly predictable pattern of orders and deliveries of aircraft. Overall, the consistency of behaviour is quite good and we can predict the future with a considerable degree of confidence.

There are occasional meltdowns, which in the short-term change the long-term relationships. When the tragic events of 9/11 happened air traffic came to an instantaneous standstill in the US and the consequences were felt for some time. Aviation did not disappear though and we could clearly understand the short-term disruptions that occurred. While unpredictable events by definition cannot be predicted, their consequences can. The result is that we can still understand what drives aviation developments and can plan for the future based on rational analysis.

The danger is that we can confuse shortterm disruptions for long-term structural changes. So, 9/11 caused a temporary downturn in traffic not to be confused with, what some analysts saw, the end of aviation. In the same way the present very positive reality of high airline traffic and high airline profits is a temporary disruption of a long-term pattern, it can be explained by special circumstances. The conclusion that we have entered a period of a paradigm shift with no more downturns is as wrong as the statements declaring the end of aviation after 9/11.

As way of example let us look at cargo traffic. In the past few years, it grew much less than before compared with passenger traffic, which led people to believe in the end of cargo traffic. Taking the long view, both passenger and cargo traffic grew at similar rates for close to seven decades. When isolating the past decade, we experienced much lower cargo growth. Some saw this as a paradigm change. Now that cargo is coming back people are beginning to accept that the low cargo growth of the past few years was an explainable aberration rather than the beginning of a new trend. The reasons for that were lower trade because of world political friction, high oil prices and low cost of money.

Looking at historical patterns, we notice that the past few years are again an aberration with traffic being unreasonably high. The above-mentioned ratio of growth of traffic to economy of greater than two has been consistently, though slowly, coming down over the past four decades. That trend has been temporarily reversed in the past couple of years because of a number of reasons. This is not a manifestation of a paradigm shift but the result of specific reasons discussed by me previously.

The thing to watch for is a possible dramatic change in the aviation environment. It is important to remember that a short-term meltdown because of current political turmoil should not be confused with a downturn in traffic in line with explainable developments subject to standard modelling. Some times these long-term relationships experience a shortterm, albeit fully explainable, disruption but eventually predictable and explainable behaviour resumes. We should expect soon a downturn back to the norm but we may get an extra push down because of the current high level of political uncertainties.

Prepare for a bumpy ride but do not lose your overall long-term vision of aviation as an important and rational element of our life.

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