The World Airline Report

The world airline industry has been to hell and backin a remarkably short period of time. From record losses of $16 billion in 2008 followed by $9.9 billion in red ink in 2009, carriers are projected to earn $2.5 billion in 2010, according to IATA’s most recent financial forecast presented at last month’s AGM in Berlin (see tables, p. 28). If achieved, this will represent an $18.5 billion profit rebound over two years after a negative swing of $28.9 billion between 2007 and 2008. But recent history hardly inspires confidence in the next six months, let alone the next year, particularly given the known-unknowns of oil prices and terrorism and the unknown-unknowns typified by Europe’s volcanic ash crisis.

Indeed, if anything is to be learned from the past 12-18 months it is that stability and the airline industry will continue to be strangers for the foreseeable future. To understand how thin the margins between tragedy and hope are, it is only necessary to reflect upon what the outlook for the next 12-24 months might be had Umar Farouk Abdulmutallab succeeded in detonating his bomb on Christmas Day.

It is also possible to frame volatility as a positive. In mid-2009, IATA DG and CEO Giovanni Bisignani worried that at least three years of revenue growth had been lost. Yet despite an unprecedented decline in passenger and cargo traffic in 2009, it is apparent that the worst-case scenario did not come to pass. Industry revenues sank from $564 billion in 2008 to an estimated $483 billion in 2009, but IATA now projects that 2010 revenues will bounce back to $545 billion, easily exceeding the $510 billion in 2007 and just 3.4% below 2008.

“We thought that it would take at least three years to recover the $81 billion [14.3%] drop in revenues in 2009. But the $62 billion top-line improvement this year puts us about 75% on the way to pre-crisis levels,” Bisignani said in Berlin.

Likewise, the fear that international premium travel was entering a sustained secular decline turned out to be overblown. The sharp drop in premium travelers bottomed in the summer of 2009 and turned positive in the fourth quarter, reaching an annualized pace of over 20% in the 2010 first quarter. Overall, IATA forecasts a 4.5% improvement in yields this year, driving a 13% rise in revenues. The cargo recovery has, if anything, been more striking: From a stunning 9.8% collapse in demand between 2008 and 2009 it is forecast to rebound 18.5%.

Although the resurgence is being driven by the macroeconomic environment, other factors are coming into play as well, lower oil prices among them. After peaking at more than $135 per barrel in July 2008, the price of a barrel of Brent crude averaged $62 last year, helping reduce industry fuel costs by 40% versus 2008. Unfortunately, the price of oil has risen considerably this year, hitting $86/barrel by late May. IATA expects it to average $79 for the full year.

The industry is doing its part as well. By and large, carriers maintained capacity discipline during the recession with ASKs down an estimated 3% last year. By the end of 2009, load factors on international flights were at record levels, according to IATA. The 2010 forecast is for a 5.4% rise in capacity, which will be manageable in a high traffic growth environment. Still, as Bisignani noted, 1,340 aircraft will be delivered this year “and only 500 are for replacement.”

On the revenue side, fare “unbundling”—the introduction of things like baggage and preferred seat fees—has created much-needed revenue streams and not just for LCCs. US carriers generated $2 billion in revenue from bag fees and other ancillary charges in just the fourth quarter. Airlines also maintained cost discipline, with nonfuel costs down an estimated 3.4% in 2009. This year’s outlook is less positive, with nonfuel expenses forecast to rise nearly 6%.

Labor unrest at British Airways and Lufthansa signals growing resistance among employees to continuing austerity diets. Most major US passenger airlines are in the process of negotiating open labor contracts, and after years of belt-tightening employees are eager to dine on something a bit richer than the potatoes and gravy they have been served since the restructurings conducted earlier in the decade.

A further challenge comes from revenue-hungry treasuries eager to cover budget deficits with new taxes on aviation. As the AGM was underway, the German government announced plans to impose a new “green” departure tax intended to raise €1 billion ($1.19 billion). “We never had a €1 billion tax gift from a government during an IATA AGM,” Bisignani commented sourly. The government says it will be in place until the Emissions Trading Scheme begins in 2012, but such taxes often have a habit of sticking around long after their ostensible purpose has been fulfilled. Rising air navigation charges are also a concern in Europe, with IATA claiming that rate hikes at 19 ANSPs added $413 million to airline costs.

And what will be the ultimate cost to airlines of Europe’s questionable handling of the volcanic ash crisis that stranded an estimated 10 million passengers and lost airlines an estimated $2.2 billion in the first week alone? Even if one accepts that safety regulators were justified in closing airspace for six days, is it reasonable that the EU passenger rights legislation contains no force majeure clause to absolve carriers of the costs of feeding, housing and in some cases babysitting and entertaining stranded passengers while the airlines were not permitted to fly?

In Review 

A look back at 2009 reveals that, as expected, Europe bore the brunt of the recession. Aggregate airline losses there are estimated at $4.3 billion. Six years of profitability came to an end for Lufthansa Group as it posted a net loss of €112 million ($160.5 million), largely owing to problems in the passenger airline business. Although this was mild compared to the losses at most other European network airlines, it signaled the depth of the crisis that cost Air France KLM €1.56 billion, Alitalia €326 million, British Airways £425 million ($534.3 million), Iberia €273 million and SAS Group SEK2.95 billion ($410.4 million).

Europe’s legacy carriers attributed their troubles to the weak economy and collapse of high-yield long-haul business traffic as well as the residue of upside-down fuel hedges and a stronger dollar. This is certainly accurate, but if additional culprits are needed one could point to rising long-haul competition from Emirates, Etihad and Qatar Airways and perhaps to encroachment in short-haul markets from the likes of Ryanair, easyJet, Air Berlin and Norwegian, although this last factor is disputed by most former flags.

At last month’s ILA Berlin Air Show, Emirates threw down a challenge to Lufthansa (and others) seeking to curb its European ambitions by ordering 32 more A380s. Political leaders in Germany and France now must manage their aviation negotiations with an eye cocked on keeping the EADS factories in Toulouse and Hamburg busy. The continent’s deepening debt crisis, coupled with the fall of the euro and fallout from the volcanic ash crisis, are among the reasons that its airlines are expected to lose money again this year—$2.8 billion, according to IATA.

Return To Form 

Airlines in the Asia/Pacific region that lost some $4.7 billion in 2008 shed a further $2.7 billion in 2009, but most of those losses were incurred in the first half of the year. Singapore Airlines hung onto its 38-year profit streak. Qantas and Air New Zealand, ATW’s Airline of the Year for 2010, also found ways to make money, albeit at a reduced rate. Malaysia Airlines doubled its income year-on-year owing to profitable fuel hedges and some aggressive sales campaigns.

Tough medicine, including parking aircraft and unpaid leave for staff, helped restore Cathay Pacific, although the largest impact came from fuel hedges and asset sales. China’s big three, heavily supported by government cash infusions and a resurgent domestic market, all posted profits after deep deficits the year before. India’s big three are still in the red, but the big two private carriers, Jet Airways and Kingfisher, are feeling better about the future in spite of the inroads made by successful LCCs IndiGo and SpiceJet (ATW, 5/10, p. 28). Air India, reeling from the crash of a 737 in May and an unsustainable cost structure, has pinned its future on a government recap that is tied to an ongoing restructuring program.

The bankruptcy of Japan Airlines, as dramatic in Japan as was the collapse of Swissair in Switzerland, seemingly left the door wide open for rival ANA, but ANA is struggling with cost issues itself. Shorn of its former government/legacy cost structure, JAL could emerge as a leaner, more nimble competitor. In any case Japan, like the US, is a mature air transport market with the added drawback of an excellent high-speed rail network. The opening of Haneda to more international flights including long-haul is a two-edged sword; it will allow both carriers to develop a better hub function than is possible at Narita, but it also devalues their strong slot holdings at NRT. Open skies with the US means antitrust-immunized alliances for both ANA and JAL but does not eliminate the challenges posed by regional rivals happy to scoop up fifth and sixth freedom traffic if liberalization permits.

Continental Divide 

IATA data show that results for North American (US and Canada) airlines improved dramatically over 2008’s $9.6 billion deficit to a loss of just $2.7 billion last year excluding special items. The outlook has brightened considerably for 2010, with carriers expected to earn $1.9 billion. Standout earnings performances last year by AirTran Airways, Alaska Airlines, Allegiant Air, JetBlue and Canada’s WestJet, four of which did not exist 20 years ago, stand in bold contrast to the continuing losses of the big five US legacy carriers plus Air Canada. The merger of United Airlines and Continental Airlines announced in May, if consummated, could help bring stability to the market and keep a lid on capacity—or not (ATW, 6/10, p. 47).

Data from the Air Transport Assn. show that domestic ASMs fell 6.9% last year, the deepest contraction since 1942. But why should a network carrier add any new domestic capacity? In 1995 dollars, the average US domestic airfare in the fourth quarter of 2009 was $227 compared to $288 in 1995 and $300 in 2000, according to ATA. Meanwhile, US scheduled passenger airlines employed 4.1% fewer workers in April 2010 than in April 2009, the 22nd consecutive monthly year-over-year decline. The total of 376,200 FTEs was the lowest since at least 1990.

Airlines need to pay much closer attention to the mood in Washington these days. The tarmac delay rule and a slew of new pro-consumer proposals show that the Obama administration intends to back up tough words with tough actions.

Consistency  

The most consistent performers during 2009-10 are the airlines of Latin America, which managed the rare feat of making a bit of money ($500 million) last year and are expected to earn $900 million this year owing to standout performances from carriers such as LAN Airlines, Gol, Copa, and TAM (which joined Star Alliance in May). Airlines in the region’s second-largest market, Mexico, were hard hit by the H1N1 outbreak. Consolidation continues to occur, with the most recent example being the merger of Grupo TACA of El Salvador and Avianca of Colombia via a Bahamas-based holding company structure that is owned 67% by Avianca parent Synergy Aerospace Corp. and 33% by TACA parent Kingsland Holding.

Airlines of the Middle East lost $600 million last year but a breakeven result is expected this year. Except for the fact that it is now larger, Emirates is the Singapore Airlines of the region, consistently profitable and determined to grow beyond the limitations of its home market if only governments in Europe, North America and Asia will permit it. Last month, Qatar Airways’ outspoken CEO, Akbar Al Baker, dismissed the notion that consolidation is required among the more than half-dozen Persian Gulf airlines, saying the majority will “just disappear,” leaving two dominant carriers.

Africa’s industry remains as fragmented as the continent itself, with few sub-Saharan airlines in shape to compete with the influx of lift from Europe and the Middle East. There are exceptions. Those along the Mediterranean and Red Seas like EgyptAir (ATW, 3/10, p. 20), Kenya Airways and Ethiopian Airlines are well-positioned to capture flow traffic, while South African Airways will get a boost from the World Cup that exposed thousands of new visitors to the attractions of the country and its integration into the Star Alliance network. In January, Ethiopian realized a long-sought objective to create a West African hub with the launch of ASKY Airlines, a Lome-based carrier operating a pair of 737s leased from ET, but that was overshadowed by the loss of an ET 737-800 that month, the first of two major accidents involving African carriers operating Western equipment this year. Although Ethiopian has had an excellent safety record, the accident helped to keep the spotlight on safety and training issues in the region.

ATW’s World Airline Report is a combined effort of the editorial staff led by Editorial Director Perry Flint and Managing Editor Kathryn Young. Contributing to the report were Christine Boynton, Cathy Buyck, Katie Cantle, Danna Henderson, Kurt Hofmann, Aaron Karp and Geoffrey Thomas. Special thanks to Silva Ishak of Ascend Worldwide. Fleet data and the airline financial and traffic tables are from Ascend Online Fleets database, www.ascendworldwide.com; tel: +44 (0) 20 8564 6700;
fleet@ascendworldwide.com.

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