Air Transport World

A soft landing.

Two years after the onset of the Asia crisis the world's airlines continue to perform well, although problems still exist

Perhaps the biggest news in the airline industry these days is what hasn't happened: A global airline recession ignited by Asia's economic downturn and fueled by the record number of jet aircraft set to be delivered through the end of this year.

To the contrary, the world's airlines remain on course, with ICAO reporting operating profits of $16.5 billion for 1998, up slightly over the $16.3 billion generated in 1997, Although the industry's operating margin declined to 5.5% from 56%, ICAO expects the net figure to be better than the record $8.5 billion earned in 1997 owing to the fact that the interest burden is lighter as debt has been retired.

Industry revenues rose 2.6% to $298.5 billion last year while expenses climbed slightly faster, 2.7% to $282 billion. Despite a decline in yields in the Asia/Pacific and Latin America/Caribbean regions, total yield per RTK was up 1%.

As ICAO noted, the results reflect "a generally healthy world economy." Credit also is due to cheap fuel, which provided a windfall savings, as well as to the continuing emphasis on cost containment. Additionally, global alliances have permitted capacity rationalization and the transfer of lift around the world, moderating the impact of the Asian flu.

Now with traffic growth in Asia turning positive--the Assn. of Asia Pacific Airlines reports that members' passenger traffic rose 16% in March on only 2% additional lift--the industry can perhaps breathe a little easier. Only the gloomy first-quarter financial news out of Europe's leading airlines and stubborn pricing softness in the US suggest that the industry may have hit a patch of rough weather.

The US market is indeed a puzzle. Airlines have done an excellent job of balancing demand and capacity since l993 and their reward has been the longest profit cycle since deregulation. But traffic growth has not kept pace with an expanding economy. Industry RPMs rose only 2.1% last year, the smallest year-over-year increase in five years. As analyst Edmund S. Greenslet noted in a recent report: "Nothing defines the problem facing the [US] airline industry today so well as this fact--the economy is growing but the airline industry is not."

Data from ATA show that passenger yields have been headed in the wrong direction since last September despite rising load factors and a healthy underlying economy, which climbed 6% in the fourth quarter. The downward trend in ticket prices contributed to a 16% decline in 1998 Major airline net earnings to $4.2 billion, although the impact should not be exaggerated; the pilot strike at Northwest Airlines had a far greater effect than lower yields that partly were compensated for by much cheaper fuel.

This trend has continued into 1999, with average domestic yield per RPM declining 1.1% in the January-April period compared to last year despite two broad fare increases. Weaker yields certainly accounted for a portion of the 21% drop in first-quarter earnings to $634.5 million. Here again, however, other factors played a bigger role: The sickout by American Airlines pilots angry over the purchase of Reno Air clipped $140 million from net profits, while Northwest still was rebuilding from its pilot strike (ATW, 6/98, p. 113).

Savings from cheaper fuel continued to offset much of the pricing weakness. But fuel prices climbed rather sharply in April, and although they remain well below year-ago levels, this has reinforced the logical belief that the earnings cycle is past its peak. News that April unit revenues declined 3% as capacity outpaced traffic was enough to prompt a mini-selloff on Wall Street.

Paradoxically, a mild downturn could prove beneficial on the political front. Dissatisfaction with the air travel experience has reached fever pitch in Washington and regulators and legislators are eager to impose solutions on the industry, some of which come dangerously close to reregulation. Should airplanes and airports become less crowded, some of the unhappiness will dissipate.

Europe does not need an aviation downturn--it has one. The Assn. of European Airlines reported that its members made a combined operating profit of $1.9 billion in 1998, down about 17% from a 1997 profit of $2. …

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