The axiom ‘when the US sneezes Asia catches cold’ does not yet seem to be holding true (outside of Japan). If anything, the European economy is struggling through the Summer heat – and the symptoms could worsen with the onset of Winter.

Eurostat (the European Union's statistics office) last week estimated that the economies of the 15 countries sharing the euro expanded just 1.5% year-on-year in the three months ended 30-Jun-08. But those economies contracted 0.2% against the first quarter of 2008 - the first economic contraction of the grouping since the euro was introduced in 1995.

Europe's biggest economy, Germany reported a 0.5% quarterly fall in April-June GDP (against the first quarter) and appears headed for further economic weakness in the months ahead, while French GDP fell 0.3% quarter-on-quarter.

European Central Bank (ECB) President, Jean-Claude Trichet, last week forecast growth in Europe would be “particularly weak” in the third quarter. The outlook is complicated by a lingering inflation problem, with the ECB reluctant to cut rates in the near term.

The growing economic gloom is reflected in weak recent traffic data for the region, particularly premium demand. The International Air Transport Association (IATA) reports that worldwide business travel has slowed in the face of weakness in financial markets and major economies in North America, Europe and Asia. The airline body added that global economic growth had been "surprisingly robust in the first quarter, but weakened sharply during the second quarter”.

IATA reported this week that intra-European premium traffic fell a further 7.8% in Jun-08 year-on-year, taking the year-to-date contraction to -6.9%. IATA observed that business passengers “continue to switch to the back of the aircraft, or onto economy-only services” - ie LCCs continue to take market share away from IATA members in the key business segment.

IATA premium traffic growth by region for the six months ended 30-Jun-08

Source: Centre for Asia Pacific Aviation & IATA

Other international markets to/from Europe have also weakened. Europe to Asia premium demand (which accounts for 15% of total worldwide premium revenues) fell 1.2% in Jun-08 year-on-year, taking the year-to-date increase down to +2.8%. North Atlantic premium demand (the largest market in the world, accounting for 31% of total premium revenues) expanded just 1.7% in Jun-08 – well below the 5.1% year-to-date expansion in 2008.

Overall, prospects are for further weakness in business and premium travel during the second half of this year, according to IATA, as economic growth continues to slow and key financial market activities, such as merges and acquisitions, which drive premium business travel, remain depressed.

IATA added that since European airlines have the lion’s share of the Europe-Asia market and are being challenged on the North Atlantic by "burgeoning US capacity", these developments suggest a “more difficult revenue environment for European network airlines”.