Air Transport World

Stable is good: the emergence of delta Air lines and Northwest Airlines from US chapter 11 restructuring this spring means that not one of the world's 10 largest airlines is in bankruptcy for the first time since December 2002. This is a major milestone for an industry that lost more than $42 billion between 2001 and 2005.(WORLD AIRLINE REPORT)(Cover story)

"Healthy" may be too strong a word to describe the current environment, given the string of disasters in the first half of the decade that continue to influence events and the ever-present threat of terrorism. Still, the industry has achieved a level of stability and profitability, and it has done so at oil prices that are near inflation-adjusted peaks. Commenting on cost-reduction efforts over the past five years, IATA DG and CEO Giovanni Bisignani noted that in 2002, "airlines needed an oil price of less than $20 per barrel just to break even" while in 2007 they "are profitable at nearly $70 per barrel."

According IATA's current outlook, released at the AGM in Vancouver in June, the industry posted a modest loss of $500 million in 2006 but earned $8.5 billion if US airline bankruptcy-related costs are excluded. It achieved an operating profit of $13 billion, representing a 2.9% margin on revenues estimated at $449 billion.

European carriers turned in the strongest performance, netting $2.6 billion, followed by Asia/Pacific-based airlines at $1.9 billion. Those in the Middle East and Latin America shared equally in a $1 billion profit while African carriers lost $300 million. North American airlines lost $5.7 billion but earned $3.3 billion if US restructuring costs are excluded.

IATA figures further show that US domestic operations shed $6.1 billion in red ink while the membership as a whole earned $4.1 billion from international operations. These numbers support the decision by US legacy airlines essentially to engage in a holding action against LCCs on the domestic front while devoting more resources to their international networks. As has been noted previously, US domestic capacity declined 1.5% last year while international ASMs rose 5.4%.

The better-than-expected performance and a brighter economic outlook caused IATA to lift its profit forecast for 2007 for a second time. In April it predicted earnings of $3.8 billion (revised from $2.5 billion) but in June it raised this 34% to $5.1 billion. It projects an operating profit of $15.6 billion representing a 3.3% margin on revenues of $473 billion.

Subject to the usual caveats, 2008 should be even better, with earnings expected to reach $9.6 billion and operating profits of $21.1 billion on sales of $496 million, a margin of 4.4%.

This optimism occurs despite the fact that oil prices are not behaving as expected. As of early June, Brent crude was at nearly $70 a barrel, well above a year-end 2006 estimate that it would average $61 this year. IATA now sees it coming in at $63 and the annual fuel bill is estimated at $119 billion, $8 billion more than in 2006. Fuel represents 26% of operating expenses, up from 14% in 2003. Airlines have managed to mitigate the impact by becoming more efficient (ATW, 2/07, p. 35). The organization says annual improvements of 2.5% in 2004-06 saved $2 billion a year.


An even bigger positive is a surprisingly resilient passenger revenue environment. True, some US carriers have reported pricing softness in the domestic market; nevertheless, international travel remains strong and healthy growth in Europe and Asia is compensating for the slowing US economy. …

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