Air Transport World

'Undramatic' year awaits airline industry in 1987.

'Undramatic' year awaits airline industry in 1987 The world airline industry will find itself flying through relatively smooth air in 1987 after the turbulence of 1986. It will enjoy a fifth consecutive jyear of operating profits as traffic continues to recover from the terrorism-spawned plunge of last year's first half. World economies will improve, fuel prices will remain low, yields will rise, unit costs will decline, and fare wars will be replaced by minor skirmishes.

S o say the airline leaders and other industry experts who were asked by Air Transport world to gaze into their crystal balls and prognosticate about the year ahead. The word they used most often to describe 1987 was "undramatic." Barring unpredictable occurrences like last year's terrorism incidents and Chernobyl nuclear accident, they say, this year should be very much like 1986.

Looking at the big picture, they see the world economy growing at about the same 3% rate as last year, with some areas (notably the Pacific) doing very well and others (Africa and the Middle East) not as well. They think inflation, interest rates and unemployment will remain low.

Deregulation to spread further

Turning to the airline industry, they expect capacity to continue to grow faster than traffic but not so fast as to trigger fare wars. They think consolidation of the U.S. industry will continue, but not nearly on the same scale as in 1986. They believe that deregulation, which already has invaded Canada and Japan, will keep spreading, as will privatization of government-owned airlines and perhaps of the U.S. air traffic control system.

Like any other year, 1987 will have its problems. The U.S. merger mania is disturbing some airline executives, as is the power concentration represented by the computer reservation systems of United and American. This year may determine whether that power can be challenged successfully as the joint Northwest-TWA venture attempts to make PARS a major CRS player and Texas Air Corp. does the same with the combination of its Continental CCS and Eastern SODA systems.

In the U.S., the delay-plagued ATC system and growing airport capacity problems will take center stage as renewal of the Airport Improvement Program is debated in Congress. The Air Transport Association will continue to push for privatization of the ATC system, and could gain important support if delays continue to mount.

Labor also may be a trouble spot as employes at carriers with big profits, like American and United, push for modification of two-tier contracts while management tries to convince them that continued profitability is dependent on low unit cost.

The ATW forecasts in the accompanying tables summarize the opinions of the crystal ball-gazers. We estimate that the world airline industry ended 1986 with a growth of 3.5@ in passenger traffic and 8% in freight, and that operating income approximated the $4 billion of 1985. In the U.S., we estimate that 1986 saw increases of 9.2% in passenger traffic and 12% in freight and that the industry achieved an operating income of $1.45 billion.

In what we think may well be a conservative forecast, we predict growth for the world airline industry of 5% in passenger traffic and 8% in freight in 1987, and we expect the U.S. segment of the industry to see growth of 7% in passenger traffic and 8% in freight. We believe yields will be sufficiently stable to allow world airline revenues to rise at the same rate as traffic, and even though expenses will climb at a slightly faster pace we expect operating income to again be close to $4 billion. For U.S. carriers we see increases of 8% in revenues and 7.6% in expenses and an operating income of $1.7 billion.

One of the most adept of the industry's forecasters in George James, president of Airline Ecnomics Inc. of Washington, D.C. He is predicting a 1987 operating income of $1.6-$1.8 billion for U.S. airlines based on increases of 7% in revenue passenger-miles, 9% in capacity and 1% in yield and a dip of 2% in unit costs. These assumptions produce an 8% rise in operating revenues and a 7% increase in expenses.

James' 1986 predictions

James was anticipating a 1986 operating income of $1.4 billion for the U.S. industry, a figure that would have required a record fourth-quarter operating profit of $700 million. "That is very attainable," he told ATW late in the year, noting yield was on the rise, traffic was growing at a double-digit pace, and the industry's fourth-quarter fuel bill would be $1 billion under that of the 1985 quarter as prices dropped to around 45^ a gallon. He expected the year to end with a 9% growth in RPMs, a 10% jump in capacity, a 6% decline in yield and a 7% drop in unit cost. These assumptions would mean a 3% rise in both revenues and expenses for the year, "producing essentially the same operating profit as in 1985."

If the fourth quarter did produce a record operating profit, it represented an amazing turnaround for the U.S. industry. The first quarter of 1986 saw a record operating loss of $669 million, and the first-half loss of $459 million was also near a record.

James noted that if his 1987 prediction comes true, "it will mean our fifth consecutive year of operating profitability and the fourth consecutive year in which operating profit exceeds $1 billion. So in spite of all the turnovers and mergers and acquisitions and certain carriers being in financial difficulty, the industry has had operating profit at a sustained level for a very long period."

Like his industry counterparts, James is looking for an unsurprising year in 1987. He sees no major fare wars, thinks fuel prices will remain low, expects continuing consolidation, and, thanks to 1986's good financial results, does not foresee any major bankruptcies--"but now that I've said that, I suppose somebody will declare bankruptcy tomorrow."

Economists and securities analysts are even more optimistic than James about 1987. Merrill Lynch is forecasting improved earnings for most U.S major airlines and First Boston is looking for "a strong rebound in earnings." Janney Montgomery Scott thinks the industry "is headed for halcyon days. …

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