Air Transport World

1984 forecast- not a boom, but at least a pop.

It was a long time in coming, but--as predicted in these pages last January--a major traffic and financial recovery finally got underway in earnest in the world airline industry in the warning months of 1983, and all indicators at this writing point to a couple of outstanding years in 1984 and 1985.

As the new year begings--and as was not the case at the time of our forecast report a year ago--all the signposts are positive.

* Traffic is climbing strongly. In the U.S., for example, the 24 major and national carriers reported a 6.6% increase in RPKs for the first 10 months of 1983--despite big traffic declines at trouble-plagued Continental Airlines and still-retrenching Air Florida--and in October traffic among the majors jumped 9.8%. U.S. scheduled airline cargo traffic for the first nine months of the year was up 5.5%, and in September the increase was 15.7%.

* Yields also are rising at an encouraging rate. The number of seats being sold at discount has dropped from near 90% in the first quarter of 1983 to the mid-70% range and is continuing to decline. The fare wars of late 1982 and early 1983 did not reappear this winter; in fact, in the U.S., rather than fare-cutting there was a move for an increase in discount fare levels in the fourth quarter.

* Improving yields produce significantly improved finances, and the third 1983 quarter brought good enough results to the U.S. majors, in spite of severe losses at Continental and Eastern, to assure the U.S. industry of operating profits for the year. Dr. GeorgeJames, sr. VP-economics and finance of the Air Transport Association of America, predicted in early December that U.S. carriers will show an operating profit of between $300 million and $400 million for 1983, and that the 1984 operating profit could be as high as $1 billion. However, he expects heavy interest expense--as high as $1.5 billion in 1984--to produce a net loss in both years.

* Even the usually pessimistic Knut Hammarkjold, director general of the International Air Transport Association, is "looking forward to the prospect of breaking through to overall profitability in 1985." He is forecasting a $500-million operating profit for IATA carrier international services for 1983--the first since 1979--and operating profits of $1.1 billion in 1984 and $1.65 billion in 1985. And, he says, "we are being conservative in our forecasts, so it may be that we will have a pleasant surprise." But, he predicted at the IATA Annual General Meeting in October (ATW, 12/83, p. 20), "mounting interest payments will continue to produce overall losses" of $1.2 billion in 1983 and $750 million in 1984. And he warned that bottom-line profitability in 1985 "will require unrelenting cost discipline, renewed traffic growth, efficient capacity utilization and a through cleanup of the gray market."

* The 60 carriers responding to Air Transport World's annual survey of prospects for the year ahead were mostly optimistic, although their optimism was tempered in some cases by memories of the "unrealized anticipations" of the past several years, in the words of one executive. These carriers are forecasting increases of 8.8% in revenues and 5.i% in expenses for 1984, and are estimating that final 1983 results will show increases of 6.1% it revenues and only 4.7% in expenses to produce a dramatic improvement in operating results. On the traffic side, they are anticipating increases of 5.7% in passengers, 5.3% in RPKs and 7.5% in freight in 1984. Their 1983 estimates were for a 1.9% dip in passengers, a 1.2% rise in RPKs, and a healthy 9.9% rise in freight.

Based on our survey, talks with a number of airline chief executives, and the pronouncements of industry leaders and security analysts, ATW steps out on its annual limb and offers the following forecasts:

% World airline traffic will show increases of 5% in passengers, 7% in RPKs and 7% in freight in 1984, compared to increases of 3% in passengers, 5% in RPKs and 5% in freight for 1983.

* Revenues will rise 9% in 1984 on top of a 7% increase in 1983. Expenses will be under 8.2% this year versus 6.2% in 1983. The result will be an operating profit for the world's airlines of $1.4 billion. The greater rise in revenues than in traffic will reflect a continuing increase in yields.

There are many encouraging factors that may make even these predictions pessimistic.

For example, carriers have managed to contain their costs in various ways. Many have obtained large infusions of new euity from a market willing to gamble on what appear to be excellent prospects in the next couple of years. Much of this equity has been used to pay off long-term debt, thus improving debt-equity ratios. Other debt has been reorganized at lower interest rates.

Hammaraskjold also notes that carriers have "cancelled or delayed equipment investment for international scheduled operations to the tune of $1.1 billion compared with earlier estimates," which has not only improved balance sheets but should hold capacity increases below traffic growth for the next couple of years.

Many airlines have made inroads into the 37% of the industry's cost represented by labor. A number of big U.S. carriers like American and United have won concessions from employes in the form of much lower starting salaries for new employes--up to 50-60% lower than previous starting wages. …

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