Air Transport World


Airline industry leaders foresee everything from a worldwide recession to record profitability in 1999.

As they watched people pile aboard planes and profits pile up in record quantities at the end of 1998, airline executives were wondering, as one questioned: "When everything feels so good, why does everybody keep making me feel like I should be saying things are bad?"

That confusion pretty much sums up the outlook for 1999, as economies and governments continue to flash mixed signals at the world airline industry. The Asian downturn may be easing--or not. The U.S. economy may be slowing--or not. Over capacity may be returning--or not. Regulators and environmentalists may clamp new restrictions on the industry--or not.

Most worrisome of all, as exemplified by recent gyrations in world financial markets, predictions of gloom and-doom could turn into a self-fulfilling prophecy as nervous businesses and investors look for any excuse to panic.

But even as they scaled back growth plans, most airline executives with whom ATW spoke were optimistic that traffic will continue to be strong and their bottom lines will remain black in 1999. They also think they are prepared for any storms that may come, thanks to healthy balance sheets and tight control over costs.

Against this backdrop, a puzzled ATW offers the following predictions for the year ahead:

* Although traffic and revenue growth will stagnate, the world's airlines will enjoy net profits of $8 billion, the same as in 1998, as revenues rise 3% to $309 billion. RPKs also will expand 3%, matching the 1998 gain, but the FTK increase will drop to 3% from 7% (see tables).

* Net income at U.S. airlines will dip slightly to $5.5 billion, from $6 billion last year, on a 4% increase in revenues. RPKs will grow at a slightly faster rate of 3%, up from 2% in 1998.

* Airlines will continue to benefit from low fuel prices, which will fall even further.

* Thanks to the fleet flexibility of the mega-airlines, capacity will remain under control. A significant number of elderly airplanes due for expensive maintenance actually will be scrapped.

* Labor unrest will continue as workers demand a bigger share of their employers' profits, setting the stage for another round of givebacks when the inevitable downturn comes.

* The "year of aviation" in the U.S. Congress will produce lots of posturing but little concrete action as regional jets mute the complaints of "underserved" communities and DOT realizes that its proposed competition policy is no cure for the flawed business plans, inept management and undercapitalization of starry-eyed new entrants.

* Continuing commission cuts and resultant travel agent fees for service will send direct bookings via Internet sites soaring. Meanwhile, the secret battle between airlines and Microsoft over Internet sales and distribution will become more visible.

* Alliances will continue to form, shift membership and change shape to evade regulatory restrictions and search with varying degrees of success for means to deliver value to customers. American Airlines and British Airways will reap most of the benefits of their nonalliance despite the grumblings of the EU and competitors.

* The shift to the euro, the end of duty-free sales and undiscovered Y2K bugs will cause considerable pain to airlines before the year is over, as will growing environmental activism and the slow pace of ATC modernization.

* AA's acquisition of Reno Air will kick off a new round of consolidation among second-tier carriers and Regionals, both in the U.S. and elsewhere. But proposed combines of larger carriers will be shot down by regulators.

* Imaginative new entrants that hit upon novel niches, as Pro Air has done with its travel contracts with GM and other corporations, will enjoy a measure of success.

* Passenger violence will escalate, reflecting a general decline in civility, and airlines will be forced to band together to deal with the problem on an industrywide basis.

* And finally, the year will bring surprises that neither ATW nor the many industry observers and executives participating in our annual survey have foreseen.

Industry organizations are generally bullish on 1999, with the U.S. airline trade association going so far as to predict a third successive year of record profits.

IATA Director General Pierre Jeanniot says a number of significant challenges will confront airlines as the century draws to a close. They include governmental efforts to reregulate the industry, introduce "energy taxes" as part of a growing environmental movement, slow down the introduction of new navigation systems and procedures, and privatize airports and ATC "without adequate watchdog mechanisms." Also on the list are improving air safety and dealing with the millennium bug, the shift to the euro beginning this month and the growth in electronic commerce.

Jeanniot sees the profitability of the past few years continuing in 1999. "Fundamental economic conditions, the effect of restructuring on costs and the impact of alliances on both revenues and costs are today's major determinants of carriers' success-or lack of it," he said in his 1998 annual report.

ATA President Carol Hallett says her members are "far more optimistic" than Wall Street about the year ahead. Fuel prices should remain low and "there's a strong argument that we are managing our capacity better than ever before."

Environmental concerns will be one of the year's big issues, says Hallett. "For all intents and purposes, we will wrap up the conversion from Stage 2 to Stage 3 at a cost to our industry of about $100 billion, and we think there's great opportunity [for us] to continue to contribute to improving the environment." ATC modernization, for example, could mean "that we would be able to reduce emissions by 12-17% by burning less fuel, so we will be pushing very hard to help FAA with their efforts to modernize the system."

Dealing with Y2K also is high on the list. "We're putting an enormous effort forward on this and I am very confident that it will indeed be safe to fly," she says. And ATA will continue its controversial effort to thwart DOT's competition guidelines. "We've proved that the DOT proposal will lead to higher, not lower, prices and less, not more, service and competition."

ATA's chief economist, David Swierenga, thinks U.S. airline profits in 1999 could equal or better the $6.5 billion he was estimating for 1998. His assumptions are that "the economy will continue to grow. We will not have a recession"; traffic will increase by 3%, up from 2% last year; yields will rise 1%, sending revenues up by 4% and fuel prices for the full year "actually [will] come in slightly below where they were for 1998," due to low demand for crude, particularly in the Asia/Pacific region. "On the other hand, some costs will be increasing, labor costs in particular."

In 1999 and beyond, says RAA President Walt Coleman, the regional jet "is going to reshape the system because of its ability to operate long thin routes and connect city-pairs that wouldn't be connected if the smallest airplane were 130 seats. …

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