Air Transport World

Traffic growth to slow in first half, show resurgence for balance of year.

Stability seems rather an odd word to use to describe a year that is likely to see sharp swings in airline traffic, pricing maneuvers that some will characterize as fare wars, expansion of the deregulation experiment outside the U.S. with attendant upheavals, a merger or two among large U.S. carriers as the consolidation process continues, some record profits and some bankruptcies, hub proliferation and a total restructuring of the feeder system.

But the term stability was often used by executives of the 90 airlines which provided data and comments for this report when they were asked about the outlook for 1986. That such a year is regarded as stable is a measure of the turmoil the industry has undergone in the 1980s.

This year, the executives agree, will get off to a poor start. The traffic weakness that manifested itself in the last third of 1985 will continue through perhaps the first third of 1986. There will be too much capacity, and yields will deteriorate as carriers attempt to woo passengers with pricing.

But there will be an upturn later in the year, they say. The consensus, reflected in Air Transport World's forecasts in the accompanying tables, is that 1986 will end with traffic growth of at least 6% (down from an estimated 9% in 1985), relatively flat yields, and an industry-wide operating profit that will be healthy even though it won't match the record $5 billion of 1984 or the $4.5 billion estimated for 1985.

Economists were forecasting late last year that the world economy will continue to grow in 1986 at about the same 3% rate as in 1985. Helping to fuel the growth, they feel, will be continuing declines in interest rates and energy prices (they see recent increases in fuel costs as a seasonal aberration), modest inflation and a strengthening U.S. dollars.

Traffic growth

Forecasts for airline traffic growth range from a low of 4% by United Airlines Chief Executive Richard Ferris to as high as 9% by some analysts. "We are still somewhat optimistic about 1986," says Lee Howard, executive VP of Airline Economics Inc. "We don't see traffic increases in the double digits for the year, but we expect growth in the 6-8% range."

The 60 carriers that provided traffic data in response to ATW's annual survey expect their passenger boardings to rise 4.7% this year after an estimated 6.9% gain in 1985, and RPK growth to slow to 5.3% from 6.3%. However, they forecast that freight traffic will regain the upward momentum it lost in 1985, increasing 10% in contrast to a 5.9% rise last year.

there is less agreement on the industry's financial outlook, although most executives again say the signs point to stability. They agree capacity will grow faster than traffic, but most think the result will be fare "skirmishes" rather than the full-scale war, Ferris predicts.

They also think (or hope) that the sophisticated yield management systems developed by the industry in the past couple of years will prevent the overall financial situation from deteriorating too badly. They agree with the belief of Avmark President Morten Beyer that fare cutting will produce "serious consequences for some carriers." However, notes one executive, most airlines today are in a reasonable position to weather economic storms, having taken advantage of three profitable years to build up their cash reserves and improve their balance sheets through debt restructuring.

Aiding the financial picture, says Howard, will be the fact that the profit decline of 1985 will defuse labor demands for increased benefits. Carriers will continue to push for two-tier wage scales and "employes will find it harder and harder to resist," he says.

And some analysts discount the overcapacity threat, noting that 1985's high traffic growth did a pretty good job of drying up excess capacity and that despite a recent order flurry, aircraft delivery schedules for 1986 are modest. They also say the surplus of experienced pilots has disappeared, lengthening training time. Ferris, whose airline is recovering from a 1985 strike, says it will be the third quarter before United can hire and train sufficient pilots to achieve maximum aircraft utilization.

The carriers responding to the survey, however, are planning significant capacity increases this year. the 63 who supplied fleet information will acquire 200 aircraft in 1986 while disposing of only 72. In 1985 they added 206 aircraft to their fleets and disposed of 115. They have another 233 on order for post-1986 delivery.

Reflecting the positive 1986 signs, the 43 carriers who provided both forecasts of 1986 operating revenues and expenses and estimates of 1985 results in their survey responses are anticipating a 24.3% jump in operating income this year. They expect their 1986 operating revenues to rise 10.5% while expenses climb only 9.9%. Only two expect operating losses in 1986, compared to six in 1985 and nine in 1984. They estimate 1985 increases of 12.7% in revenues and 13.3% in expenses for a 6.1% reduction in operating income last year.

Airline Economics estimated in December that the U.S. industry would report a 1985 operating profit of $2 billion, down a bit from the 1984 level, and predicted that this year's results "will not be quite as good," probably between $1.5 billion and $2 billion as revenues rise 5-7% but are outpaced by expenses. Not all carriers will be profitable, Howard says; "there will be some big winners, but some losers as well." Yields will be "flat to down slightly" due to overcapacity, but he does not foresee severe fare wars.

Members of the International Air Transport Association in 1984 posted an operating profit of $3.5 billion and their first net profit--$1 billion--since 1979, but IATA Director General Guenter O. …

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