Air Transport World

Searching for magic in '92. (airline industry forecast) (Cover Story)


Despite the first year in recent memory of declining of traffic and a second consecutive year of massive losses, the world airline industry is entering 1992 with considerable optimism. Because things can't get much worse, the consensus seems to be, they're going to get better-although perhaps not before the middle of the year and perhaps not in time to produce more than token profitability.

Of course, a year ago, industry forecasters thought the same about 1991. But that was before the Gulf War and persistent recession in many areas of the world sent consumer confidence and business travel plummeting. However, the thinking at year end 1991 was that air transportation is essential to world commerce and cannot help but grow and most signs point to a renewal of that growth. severe difficulties don't lie ahead. One of the biggest will be finding the money with to buy the airplanes to replace aging and n meet future demand. AMR Chairman Robert Crandall contends that the last two years have wiped out all the profits the U.S. airlines have made since the beginning of air travel. in an era when conditions of the world's financial institutions are almost as bad as the airlines, an industry with a history of unprofitability is hardly the most attractive applicant for scarce capital.

Also a problem is paying for the infrastructure the industry will need if traffic doubles as predicted in the next decade. Governments increasingly are imposing these and other costs, taxes and fees on the airlines-and ultimately on their passengers via higher fares, which, of course, drive customers away. The International Air Transport Association wants to list all governmental charges on ticket inserts but governments would prefer to keep them hidden. In the U.S., many airlines expect to do battle this year with cities over the passenger-facility charges that were authorized by Congress last year and that airlines fear will be imposed to construct "Taj Majals" and create local jobs rather than to enlarge system capacity.

As 1991 drew to a close, economic signals were so mixed that the only appearance of certainty was that whatever recovery occurs will be far from robust. In the U.S., economists see a rise of only 2-3% in the real gross national product, about half the growth registered in a normal upturn. Whether the politicians will be able to inject new life into the economy in preparation for the presidential election remains to be seen. However, the massive deficits inherited from the tax-cutting Reagan years give the government little room to move without causing greater long-term damage.

Most of the airline executives and industry observers with whom Air Transport World consulted do agree that this year will bring a continuation, both in the U.S. and abroad, of the restructuring that has marked the industry for the past few years. Many U.S. airlines blame 1991's financial woes in large part on bankruptcy laws that circumvent free-market forces by keeping excess capacity in the air and allowing the weak to undermine the strong. Some go so far as to say that a strong economic recovery would do further damage by keeping "the walking dead" alive even when they have no hope of regaining their health.

Last year's carnage was pretty bad. Among the airline logos that vanished were those of Eastern, Pan Am, Air Europe and the first child of deregulation," Midway Airlines. Forced to seek bankruptcy protection were Pan Am, TEA, America West and Continental. Planning bankruptcy is TWA. Planning to disappear into United is Air Wisconsin. And getting odds that some of the bankrupt win be liquidated and that other bankruptcies will occur is easy.

Meanwhile, the strong got stronger. Among transactions, United also acquired Pan Am's Heathrow hub, American gained Heathrow entry via purchase of TWA'S London routes, Delta bought the Pan Am Shuttle and most of the rest of that carrier's. European operations, and regional Mesa bought Air Midwest and win leap into the ranks of the national carriers by acquiring fellow United

Express Westair.

Southwest tried to do a gate transaction with Midway and lost the initial rounds before ending up with much of the

Midway Airport traffic, anyway. Now Usair is attempting to of Continental's LaGuardia and Washington National operations. Northwest bought Eastern's Washington National gates and continues to talk about acquisitions but its flirtations with the Trump Shuttle and Midway came to naught, and indications are it won't be bu Continental or America West, either.

While carrier failures and bankruptcies were fewer outside the U.S., some major restructuring continued. British Airways is said to be talking merger with KLM-which owns part of Northwest-and Air France with Sabena. Air France already has acquired French carriers Air Inter and M. With the dropping of the European Community's borders at the end of this year, more such alliances and mergers are just a matter of time. As Delta's Vp-marketing, Al Kolakowski, likes to say: "The only constant in this industry is change."

The forecasts of airlines that replied to ATW's annual survey of the year ahead will be found in the accompanying tables. For the most park they are quite optimistic. Views of industry executives and analysts follow:

"We're definitely an industry in crisis," says David Sweirenga, assistant VP for airline industry data at the Air Transport Association of America. In November, he was looking for 1991 to be "the second-worst year"-1990 was the worst-in U.S. airline history, with an estimated net loss of $1.3 billion. For 1992, he sees "some slow improvement in the economy but not real strong growth," and is forecasting that U.S. carriers will post increases of 6% in RPKS and 9% in revenues. "That, however, translates into a net profit of only about $300 million," he notes.

The U.S. industry's biggest future problem in fight of its "weakened financial position" will be attracting the $15 billion a year in capital that will be required to phase out Stage 2 aircraft by the end of the century, in his view. Other "persistent problems" are the capacity of airports and the ATC system. "That, basically, is the heart of it," he says. "Where will we get the planes and are we going to be able to lly them and find a place to land them?"

At the IATA AGM in October, Director General Gunter Eser forecast "a second year running of record loss" for 1991 and declared that "the economic status of the airline industry is worse than at any time in its history-the industry is bleeding to death." However, he expects a reasonably strong recovery in traffic this year.

Considerable optimism about the year ahead can be found among industry consultants.

Lee Howard of Airline Economics looks for "a little operating profit, less than $1 billion," following a $1.5 billion operating loss in 1991. He thinks "traffic will rebound, and at a faster rate than the recovery of the economy, because a lot of deferred trips will be taken as soon as business and consumer confidence returns." He also sees "some recent indications there's going to be more rational pricing. Recent fare reductions have resulted in loss of revenue rather than stimulation." However, he notes, "fuel prices are creeping up again, as are labor costs, because contracts are reducing the 2-tier wage system's impact."

Howard still believes that the U.S. will end up with four or five airlines. The first tierAmerican, Delta, United-is set. In the second tier of Continental, Northwest and USAir, I think two will survive. I don't know which two at this point. Among the others, America West will have a tough time." Edmund Greenslet, head of ESG Aviation Services, thinks this year "will be a very pronounced turnaround from 1990 and 1991" even though earnings will not be at a level the industry needs for all its capital spending programs. …

Log in to your account to read this article – and millions more.