Tuesday, December 15, 2009

With Another Bad Financial Year Ahead, World Airlines Look to More Consolidation

The indicators are clearing up for next year it's apparent now that world airlines are going to lose more money in 2010 than had been anticipated.

The International Air Transport Association today said world airlines are likely to lose about $5.6 billion in 2010, a figure considerably higher that the previous early forecast of $3.8 billion. IATA maintains its forecast of a $11 billion loss for 2009.

“We are ending an annus horribilis that brings to a close the 10 challenging years of an aviation decennis horribilis. Between 2000 and 2009, airlines lost $49.1 billion," said Giovanni Bisignani, IATA’s director general, tossing around both the Latin and the numerus horribilis.

“The worst is likely behind us," he said. Demand is improving and airlines are cutting non-fuel costs, he said.

On the other hand, I would note, airline employees are pushing back on cost-cuts, as demonstrated by the looming Christmas holiday strike by flight attendants at British Airways, which stands to take a financial clobbering not factored into current forecasts.

Plus, oil prices are edging up again, though airline cost-cutting is mitigating the full impact. IATA is forecasting an average price of $75 a barrel next year, up from the average of about $62 that is expected for this year. And the Air Transport Association in the U.S. is sounding a warning about speculation in the oil market.

Meanwhile, airlines are still unable to boost prices to offset costs. While a total of 2.28 billion passengers are expected to fly in 2010, bringing demand back in line with the peak recorded in 2007, though with $30 billion less in revenue, as fares continue to remain low by comparison with 2007. Passenger revenue, which fell 12% this year, is not expected to grow much next year, when previous aircraft orders will add 2.8 percent to total capacity.

"On top of this, corporate travel buyers have adjusted their budgets to reflect lower premium fare levels," IATA said.

The days of those $11,000 business class fares between New York and London are over.

"Tough times continue," said Bisignani.

And as I have been saying all year, something's gotta give.

"The industry is structurally out of balance," Bisignani said. He called it "hyper fragmentyed."

And that is another indication that the industry intends to consolidate further, mostly through the kinds of route and alliance collaborations that are really quasi-mergers.

“Consolidation is the great hope for the industry. The round of consolidation experienced since this horrible decade began is a step in the right direction. But it has been confined within political borders as a result of ownership restrictions in the archaic bilateral system. The industry cannot afford the mounting losses of the status quo. The next decade must facilitate consolidation,” Bisignani said.


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