World Airlines Faring Better as Travel Demand Picks Up

Airlines will lose only a total of about $2.8 billion this year, rather than the previously forecast $5.5 billion, as travel demand picks up more forcefully than anticipated, the International Air Transport Association said today.

The recovery in demand became more robust around the end of last year and "continued into the first months of 2010," the trade group said. "Relatively flat capacity translated into some yield improvement and stronger revenues," it said.

However, first-class and business-class travel continues to lag, and it is not expected that it will return to the boom days any time soon, if at all.

"Premium yields, which are 20 percent below peak, may be suffering a structural shift," IATA said.

IATA announced a revised estimate for losses in 2009, which have not been fully tabulated yet. The new estimate is that airlines lost $9.4 billion overall in 2009, rather than the previously forecast $9.4 billion. Of that, $1.8 billion in losses is represented by U.S. carriers.

"Improvements are driven by economic recovery in the emerging markets of Asia-Pacific and Latin America, whose carriers posted international passenger demand gains of 6.5 percent and 11 percent respectively in January. North America and Europe are lagging with international passenger demand gains of 2.1 percent and 3.1 percent respectively for the same month," the IATA statement says, adding:

“We are seeing a definite two-speed industry. Asia and Latin America are driving the recovery. The weakest international markets are North Atlantic and intra-Europe which have continuously contracted since mid-2008,” said Giovanni Bisignani, IATA’s Director General and CEO.

"Forecast highlights include:

Improving Demand: Passenger demand (which fell by 2.9 percent in 2009) is expected to grow by 5.6 percent in 2010. This is an improvement on the previous forecast in December of 4.5 percent growth. Cargo demand (which fell by 11.1% in 2009) is expected to grow by 12 percent in 2010. This is significantly better than the previously forecast 7 percent growth.

Load Factors: Airlines kept capacity relatively in line with demand throughout 2009. A strong year-end recovery pushed load factors to record levels when adjusted for seasonality. By January the international passenger load factor was 75.9 percent. .

Yields: Tighter supply and demand conditions are expected to see yields improve—2.0% for passenger and 3.1% for cargo. This is a considerable improvement from the precipitous 14% fall experienced by both in 2009.

Premium Travel: Premium travel, while slower to recover than economy travel, now appears to be following a cyclical recovery in volume terms. But it is still 17 percent below the early 2008 peak.

Fuel: With improved economic conditions, the price of fuel is rising. [MY NOTE: Oil closed at $82 yesterday] IATA raised its expected average oil price to $79 per barrel from the previously forecast $75. That is an increase of $17 per barrel on the $62 average price for 2009. The combined impact of increased capacity and a higher fuel price will add $19 billion to the industry fuel bill, bringing it to an expected $132 billion in 2010. As a percentage of operating costs, this represents 26%, up from 24% in 2009.

Revenues: Revenues will rise to $522 billion. That is $44 billion more than previously forecast and a $43 billion improvement on 2009.

“Revenues are half-way to recovery—US$42 billion below the 2008 peak and US$43 billion above the 2009 trough. Important fundamentals are moving in the right direction. Demand is improving. The industry has been wise in managing capacity. Prices are beginning to align with the costs—premium travel aside. We can be optimistic but with due caution. Important risks remain. Oil is a wild-card, over-capacity is still a danger, and costs must be kept under control—throughout the value chain and with labor,” said Bisignani.

Regional differences in airlines prospects are sharp:

* Asia-Pacific carriers will see the $2.7 billion 2009 loss turn to $900 million in profits on the back of a rapid economic recovery being driven by China. Cargo markets are particularly strong with long-haul cargo capacity for shipments originating in Asia experiencing a capacity shortage. Demand is expected to grow by 12 percent in 2010.
* Latin American carriers will post an $800 million profit for the second consecutive year. The region’s economies are less debt-burdened than the US or Europe. Economic ties to Asia helped isolate the region from the worst of the financial crisis. Carriers in parts of the region have benefited from liberalized markets which have facilitated some cross-border consolidation, giving greater flexibility to deal with changing economic conditions. Demand is expected to grow by 12.2 percent in 2010.
* European carriers will post a $2.2 billion loss — the largest among the regions. This reflects the slow pace of economic recovery and faltering consumer confidence. Demand is expected to grow by 4.2 percent in 2010. Intra-European premium travel is expected to recover more slowly. In December it remained 9.7 percent below previous year levels.
* North American carriers will post the second largest losses at $1.8 billion. The jobless economic recovery continues to burden consumer confidence. Demand is expected to improve by 6.2 percent in 2010. But with intra-North America premium travel still down 13.3 percent as of December, the region remains in the red.
* Middle East carriers are expected to experience demand growth of 15.2 percent in 2010, but will see losses of $400 million. Low yields in long-haul markets connected over Middle East hubs is a burden on profitability.
* African carriers are likely to post a $100 million loss for 2010, halving 2009 losses. Demand is expected to improve by 7.4 percent. But this will not be sufficient for profitability as they continue to face strong competition for market share.

Structural Adjustments

"The stark contrast between profitability among Asian and Latin American carriers while losses continue to plague the rest of the industry clearly demonstrates the fact that airlines have not been able to develop into global businesses. The restrictions of the bilateral system prevent the kind of cross border consolidation that we have seen in industries such as pharmaceuticals or telecoms. Airlines are battling the challenges of the financial crisis without the benefit of this important tool. It’s time for change,” said Bisignani."

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