NASA'S Role in Aeronautics A Workshop (1981) / Chapter Skim
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THE WORLD ECONOMIC AND FINANCIAL OUTLOOK
THE WORLD ECONOMIC AND FINANCIAL OUTLOOK
Pages 15-24
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From page 15... ...
Although dedicated to the concept of less government regulation of industry, many of us in the financial community were concerned about the impact of legislation that encouraged more competition and lower fares in a future environment of steady cost increases, continuing fluctuation of traffic levels with the economic cycle, and an inability to realize the dramatic productivity gains through improved technology that were achieved in the past. We are still concerned, and recent events seem to indicate that our skepticism was well founded.
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From page 16... ...
During the l974-l975 recession, traffic growth was less than l percent, but at least it was positive. The situation is complicated by the fact that under the new regulatory environment we have excess capacity, and although it is now possible to raise fares to cover increased costs, particularly fuel costs, many carriers are hesitant because of the negative impact on traffic.
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From page 17... ...
Perhaps the most sweeping impact of the present aviation policy of the Carter Administration is on the international carriers serving the United States. Even though foreign carriers are not directly affected by the Airline Deregulation Act of l978, by means of bilateral negotiations, the Civil Aeronautics Board (CAB)
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From page 18... ...
Although this anticipated traffic growth will help pull the domestic industry out of the doldrums and improve operating performance, we have to recognize the fact that the l5 percent annual rates of traffic growth we have enjoyed in the past will probably not be with us. In addition, the cost of fuel and labor will continue to escalate, while yields will continue to be under pressure both from the political aspect of consumer pressure and as a possible deterrent to traffic growth.
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From page 19... ...
As indicated, traffic growth will probably be more moderate, thereby limiting airline options in maintaining profitability through improvements in aircraft productivity or increasing of the price of their product. If the productivity gains are not there, then the only alternative is to increase fares, which at some point adversely affects traffic and will eventually halt the steady growth of the air transportation industry and may even lead to some contraction.
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From page 20... ...
As indicated, in an environment of continued increases in fuel and labor costs, political pressure on yields, and a lower rate of traffic growth, it is vital that the airlines operate the most cost-efficient aircraft to ensure profitable operations. Failure to achieve sufficient earnings to attract capital for fleet modernization will eventually lead to losses and financial instability as the high-cost environment accelerates the economic obsolescence of older aircraft -- aircraft that the airlines cannot replace because of insufficient financial capacity.
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From page 21... ...
With the continuing escalation of the cost of aircraft, the payback period to the airline grows longer and it is most important that the financing more closely matches the useful economic life of the aircraft. In addition, due to the cyclical nature of the industry, cash-flow considerations dictate that a significant portion of a carrier's financing must have a repayment term in excess of that available from commercial banks; hence, the importance of the institutional lenders.
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From page 22... ...
Lenders also want to see a sound capital structure with moderate leverage to gain confidence that the airline can ride through the normal economic cycles that historically have affected airline traffic and earnings. In conclusion, the same sources of capital utilized in the past will be available in the l980s and beyond to assist the airlines in modernizing their fleets as long as they can demonstrate sufficient earnings and cash flow to meet their obligations.
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From page 23... ...
view this will only be possible if the aviation industry has at its disposal cost-efficient aircraft that will permit them to operate profitably in the anticipated economic environment where costs will be higher, fares tailored to the ability of the public to pay, and traffic growth less robust than in the past. I hope that your deliberations this week will bring us closer to that goal.
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