Last week IATA provided an interesting perspective on airlines coping with more uncertainty than usual. In the chart you see IATA suggests three scenarios that could play out. Next to each of these is their rating of the likelihood of that scenario playing out. IATA thinks the most likely scenario would be the “muddle through” option.
This appears to be a good guess. Economic uncertainty impacts commercial activity – the more risky the future looks the less investment occurs. If the economic picture is gloomy salesmen have a tougher time and tend to travel less, impacting airlines – which could delay airplane deliveries. Uncertainty at such a deep level is a bad outcome for airlines and consequently the entire aerospace food chain.
Almost as if to bolster just how weak things are looking, IATA also offered this chart. Today the European Central Bank moved to offer financial support to EU banks. Reuters notes the ECB offered three year loans to banks to the tune of €490 billion. This seems to mirror IATA’s muddle through scenario. Does this allow the EU banking system to buy enough time? Three years from now these loans must be repaid – is that enough time to get economies to grow out of the recession? What will the banks be doing with these loans? Given the unsettled nature of key EU economies (Ireland, Portugal Spain, Italy and Greece) EU banks might just sit on the cash. The loans carry a 1% interest rate – so sitting on the cash costs may be more attractive compared to lending risks.
Given the ECB move, look at the IATA scenarios again and note that IATA only sees a 10% chance things are worked out and a 90% chance things won’t work out. If muddle through is the best option, this is truly scary. For the EU’s airlines this is an uncomfortable situation.