Air Transport World

Savoring a profit cocktail: 'happy days are here again,' as 1996 promises to be even better than 1995.(1996 Forecast)(Cover Story)(Industry Overview)

With what promises to be a second consecutive year of record profits dawning, the big question for 1996 is whether the world airline industry can tolerate prosperity.

Will the year bring strengthened balance sheets or a return to profligate spending on airplanes and demanding employees? Will the expensive lessons of past rounds of mergermania be forgotten? Will the financial community again be blinded by the industry's glamorous aura and provide excessive capital for dubious ventures? Will the allure of growth and critical mass outrun market demand?

When the next inevitable economic downturn occurs, will the industry have learned the secret of remaining profitable even in bad times?

The consensus of the myriad industry leaders and observers with whom ATW spoke is that those bad times will not appear this year. Despite mixed signals, economies will continue upward, and as a result, more people will fly, they agree.

There will be problems, of course--restive labor, continuing pressure on yields, growing shortages of airport and airways capacity, and probably, a few costly new governmental regulations and taxes.

But the good times of 1995 should continue this year and perhaps for several years, say the crystal-ball gazers. Here, ATW offers its own forecasts:

* The world's airlines will enjoy an operating profit of $10.6 billion and a net of $7 billion this year, up from $9.5 billion and $5.5 billion in 1995, as revenues rise 9.8% and expenses 9.7%. In the U.S., operating income will rise to $6.8 billion from $5.5 billion and net to $3.5 billion from $2.1 billion.

* World RPKs will swell 6.7% against 6.5% in 1995. FTK growth will slow to 10.5% from 12%. In the U.S., RPKs will rise 3%, the same rate as last year.

* Despite United Airlines' decision not to acquire USAir, merger discussions will continue among many carriers, and further consolidation will occur both in the U.S. and elsewhere as second-tier airlines combine and some nations finally decide that the prestige of a national carrier is not worth the cost.

* New alliances will form even as some older ones collapse and reshaping of the industry into a handful of global consortia will accelerate as regulatory barriers to creation of true multinational airlines are breached.

* Bilateral frictions will continue between the U.S. and other nations, with few resolutions. But the move to multilateralism will strengthen. Pressures for increased access to U.S. markets will intensify.

* Liberaliation will continue to advance slowly as governments provide shelter for weak and timid airlines. The EU will allow additional bailouts but with increasingly strict conditions, and the gap between privatized "haves" and state-supported "have nots" will widen.

* Labor will press for a share of new-found profits and for job protection while management continues to push for lower labor costs. Strikes will proliferate in Europe and may even occur at U.S. airlines. Expanded use outsourcing will become a flash point for labor.

* The role of travel agents in the distribution of airline tickets will diminish as electronic ticketing and direct customer access to airlines' res systems spread around the world. Travel agents will carve out new roles for themselves as travel managers and will find a way to levy fees despite last year's failure of initial attempts to do so.

* Customer service will regain its place as a competitive tool in the U.S., as airlines reverse too-deep cuts and restore amenities, particularly for full-fare economy passengers.

* Airlines will resume ordering airplanes as load factors remain at record levels and Stage 3 deadlines loom. But shortened manufacturing lead times may help to curb overordering. New models, including growth 747s, will be launched but none will break major cost/efficiency ground.

* Record profits will inspire governments to seek new taxes and fees, and U.S. consumers used to blood-letting fares will cry for reregulation. Environmental pressures on airlines will rise.

The 50-plus airlines responding to this annual survey are more optimistic than ATW (see tables), forecasting growth of 9.2% in passengers, 8.7% in RPKs and 19.8% in FTKs. On the financial front, they expect an 11.8% jump in revenues and an 8.3% rise in expenses to send operating income soaring 70.9%. They will add 239 aircraft to their fleets, while disposing of 148. In 1995, they added 266 and disposed of 141. They have ordered 386 for delivery after 1996.

Industry-group officials hope 1995's good results can be sustained. IATA DG Pierre Jeanniot was "pleased and somewhat relieved" to report to the recent AGM the first net profit for IATA members since 1989--$1.8 billion in 1994--and to forecast a record net of $5.7 billion for 1995. But he cautioned against relaxing cost-control and restructuring efforts and asked: "When that next recession arrives, will you have the balance sheet, the cost-effective fleet and the operational flexibility to survive it?"

Jeanniot cited sales costs--18% of total costs in 1994--as the "one Holy Grail area of cost reduction still to be fully explored." IATA has launched a review of the distribution system, "to bring it into line with market, regulatory and technological conditions." Travel agents, it says, need to redefine their role and their remuneration system, and become reconciled to a gradual but radical transformation to customer consultants.

Meanwhile, ATA President Carol Hallett says: "It's frustrating when people say after two good quarters, well the [U.S.] airlines are profitable again, overlooking that we've lost $13 billion in the last five years and have $75 billion to pay out on government-mandated Stage 3 noise level requirements."

She frets that "traffic growth has been relatively flat for the last six months and that is when airlines start getting nervous and discounting." And "labor is going to have to continue to be a part of the overall cost-control effort. …

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