AIRLINES

This financial year, Australia’s airline industry will cull around 2000 jobs, experience a 4.6% drop in revenue and 1.8% fall in profits, with international airlines suffering the most severe decline in demand.

While cheaper aviation fuel has helped limit losses to profitability, the situation has been made worse by the need to heavily discount fares to boost demand. Significantly lower international trade is also affecting freight transport, which was 28% lower in the Asia/Pacific region in January compared with 2008.

Woes in freight transport are compounding the challenges facing the sector this year and beyond.

Opportunities:

• By focusing capacity on routes with consistent demand, airlines will spread their risk.
• Direct marketing activity is likely to be directed towards middle to high-income passengers with the ability to spend more on travel.
• Savvy operators will package products with accommodation and activities to encourage extra spending.
• By reducing variable costs and services, operators will counter low demand.
• Airlines have a chance to gain a brief spike in revenue by targeting recipients of the Federal Government’s $900 stimulus handout.

AUTOMOTIVE INDUSTRY

This financial year, the automotive industry’s revenue will drop by 6.3%, job losses will reach about 3000 and further massive losses – both financial and human capital – are inevitable.

Throughout the past decade, the Australian car industry has been struggling to prove its profitability, with domestic manufacturing suffering from overcapacity and unable to prove it can compete effectively against imports – a situation expected to be exacerbated by the economic situation.

In the current financial climate, consumers are expected to postpone purchasing cars until the outlook is more optimistic, and at the lower end of the supply chain, dealers have been having a hard time finding finance to stock showrooms. The fact GMAC and GE Money have exited the auto finance sector has intensified the credit woes plaguing dealerships.

Opportunities:

• Consolidation across all parts of the manufacturing sector is crucial, from components manufacturers to larger assembly plants. Major plants can do this to address excess capacity, while many components manufacturers are small businesses that face being wiped out without becoming more efficient in dealing with their place in the supply chain.
• Continue investing in developing greener cars – a move the Government will support.
• Innovative manufacturers will focus on developing/designing large cars that are both aesthetically pleasing and green.
• To protect profitability, retailers will offer more than one brand of car, while cultivating stronger relationships with financiers and manufacturers.

INSURERS

Insurers’ bottom lines continue to take a battering as higher claims weaken underwriting profitability and the financial crisis continues to vaporise investment earnings. For health insurers, IBISWorld expects revenue to contract by 5.1% this financial year, with premiums falling by 4.4% and the industry realising an investment loss.

Meanwhile general insurers are anticipated to experience a year-on-year revenue decline of 1.8%, as growth in premiums is offset by lower investment income.

Lower revenue combined with rising claim expenses will squeeze insurers’ profits. Health insurers are expected to report an after-tax margin of just 1.4% – nine percentage points lower than 2006?07.

And despite rising premium rates, lower revenue and higher claims will drive general insurers’ profitability down to 6.2% – six percentage points lower than 2006-07.

Operators within both of these industries have undertaken significant headcount reductions in order to cut costs, and there are more job cuts to come. Over the 2008-09 year, IBISWorld expects employment across these two industries to fall by about 1080, or 2.6%.

An additional challenge for health insurers is the change in the Medicare levy surcharge thresholds, which has resulted in a material number of younger members dropping their private health insurance cover, and IBISWorld estimates many more will soon follow.

As it is the younger members who generally subsidise the benefits of the higher claiming older members, for health insurers, losing younger members translates into a direct loss of profit. The current outlook and immediate future for health insurers is therefore grim, with last year’s “black September”, “disaster October” and “suicide November” leaving portfolios in tatters.

Opportunities:

• Despite securing a 6% increase in premium rates, health insurers will continue cutting administrative costs, and mergers and acquisitions may be the most efficient vehicle for companies to realise economies of scale in administrative functions.
• Product innovation will be essential for long-term viability in a climate of severe health cost inflation and an ageing population. One potential solution could be to radically alter the private health system from underwriting to savings. Such a system would be similar to Australia’s superannuation scheme, with contributions to health savings accounts made by individuals and employers.
• Disciplined pricing and sensible cessation policies will be a priority for general insurers, with a return to adequate pricing paramount to boost industry profitability.
• General insurers must continue to cut administrative expenses.

MUSIC PRODUCERS

The mass migration from purchasing music in-store to accessing it online has hammered the music production and retail industry. IBISWorld expects the current downturn will accelerate this trend as listeners seek to download discounted or free music.

And with artists increasingly open to using the internet to bypass record labels, and labels so far unable to devise a successful way to make online music profitable, it’s not just 2009 that’s looking grim. IBISWorld forecasts revenue will drop by 5.1% this financial year, around 200 jobs will be lost, and most music producers will run at a loss.

Opportunities:

• Music producers are more likely to accept online distribution and embrace the change.
• Operators using “360 deals” to share revenue with artists’ live performance and merchandise revenue – as well as publishing, sales and licensing – will help shore up profits.
• Progressive players may abandon copy protection such as DRM (digital rights management) as it only serves to encourage more consumers to access music illegally.
• Bypassing the low margins offered by iTunes to sell direct to consumers (via artists’ or labels’ own websites) is a trend expected to grow during difficult times.

This report was prepared by IBISWorld analysts Suzanne Walker, Raghu Rajakumar, Roman Zwolak, Ross Connor, Sarah-Jane Derby, Richard Jeremiah, Ian MacGowan, Edward Butler and Ellada Mirimania.

A full copy of this report can at IBISWorld’s website.