Air Transport World

Momentous events muddle the future; the question for 1991 is how drastically the airline industry will be reshaped by the time oil prices fall and economies improve. (forecast for 1991)

The question for 1991 is how drastically the airline industry will be reshaped by the time oil prices fall and economies improve. By Danna K Henderson.

By mid-1991, oil prices will sky to $100 a barrel or plummet to $15. Economies will be plunging into recession or growing strongly. Airline traffic will be stagnant or vibrant. Three, six or no more U.S. carriers will have failed. The airline industry will be suffering record operating losses or relishing healthy gains.

This is the range of predictions that Air Transport World encountered among airline executives, securities analysts and economists during the annual exercise of forecasting the course of the industry in the year ahead. In view of the momentous occurrences of 1990, such diversity hardly is surprising.

Eighteen months ago, did anyone imagine that by today, virtually all the barriers that divided East and West would be rubble? That German reunification would be a reality and Lufthansa would be back in Berlin? The Cold War would formally be consigned to history and piles of conventional arms to the scrap heap?

In retrospect, given the chronic instability in the Middle East, perhaps the least surprising event of 1990 was Iraq's Aug. 2 invasion of Kuwait, although its impact on the world airline industry was the most immediate. Paling by comparison were airline-specific occurrences such as the adoption by ICAO and the U.S. Congress, after years of wrangling, of procedures for retiring Stage 2 aircraft, the U.S. decision to allow airports to impose passenger-facility charges and Continental's December bankruptcy filing.

Essential to planning

After last year's surprises, it is with considerable trepidation that ATW and the industry leaders with whom we consult each year offer any forecasts at all. But as one executive commented, forecasting is essential to planning, so somebody has to do it. The forecasts set forth in the accompanying tables, representing the consensus of industry experts and results of ATW's annual survey are educated guesses at best. At least partial agreement exists on some of the problems and issues that face the airline industry in the year ahead. The U.S. economy, which has been slowing for several months, has entered either a recession or something that feels very much like one. The economies of the U.K. and Australia also are in trouble and those of the U.S.S.R. and the newly democratized European nations are in shambles. Although most forecasters anticipate an upturn in the second half of the year, weak economies mean softening or even declining traffic for airlines. The meteoric rise in oil prices that followed the invasion of Kuwait likely will mean 1990 operating losses totaling $2 billion or more for the airlines of the world, who were unable to boost fares as quickly or as steeply as fuel costs soared. And because, unfortunately, cash-poor airlines inevitably cut fares when traffic softens in a usually unsuccessful effort to improve load factors, losses of equal magnitude are not unlikely this year. And fuel is not the only cost problem: Skyrocketing as well are labor costs, insurance premiums, taxes, user fees and maintenance and environmental expenses.

Northwest in danger?

Although most experts believe-or at least hope-that a growing glut will drive oil prices down in the next few months, the blow to weak U.S. carriers may be fatal. Some observers are willing to make a case for the demise via consolidation or failure of Eastern, Continental, Pan Am, TWA, Midway, Hawaiian and even Northwest with its big leveraged-buyout-debt burden and USAir with its flawed route structure.

Nearly all agree that the strong-American, United, Delta and Southwest-will get stronger as the shakeout unfolds. And of course, asset sales, such as Pan Am's transfer of its London routes to United, and Continental's sale of Seattle-Tokyo to American could keep all of the endangered carriers alive through this year and beyond.

While coping with the fuel crisis via layoffs and other cost-cutting measures was occupying everyone's attention as last year ended, other issues loom, among them a potentially huge shortfall in the capital that will be needed to replace aging fleets and inadequate infrastructure, and the impact of the immense changes in the European political scene and of the creation of the European single market at the beginning of 1993 (see related article, page 48). All observers agree that the pace of globalization of the airline industry will increase, with the only remaining question being its exact form.

Unless fuel costs fall quickly, says ATA President Robert Aaronson, "we're going to see a very different industry than we're used to having, with a reduction in services offered to the traveling public.... Even the strongest companies are hemorrhaging cash and that's unprecedented." He also worries that the "significant transfer of assets that likely may lead to increased pressure for reregulation, "which would be a serious mistake for the country. The evidence suggests [regulation] suppressed growth and development of an industry. And just about everybody who worked at the CAB now says they weren't able to regulate very well."

Aaronson forecasts "a U.S. industry loss in excess of $1 billion for 1991, with the caveat that it could be considerably greater. Traffic will probably be flat at best, because the continuing need for price increases will suppress demand and the economy is very weak."

In other areas, ATA has "a continuing concern about the capability of [the U.S.] FAA as presently organized to keep building the ATC system. There's a need for significant reform there." As for cabotage and foreign ownership of U.S. airlines, Aaronson thinks that those are "big issues for the future but not 1991." He also notes that California's new South Coast Air Quality Plan "could restrict any further growth of air service in Southern California. It's pretty Draconian."

The consultancy firm Airline Economics, Inc., is forecasting $1.5 billion in operating losses for the U.S. industry for both this year and next on the assumptions, says VP Lee Howard, that, "the economy will remain slow, traffic will be depressed modestly by fare increases and overall unit cost will increase at a high rate."

The picture could change, he says, if several money-losing carriers collapse. "Then, their losses wouldn't be there and the remaining carriers would have the benefit of a lot of their traffic. But airlines linger on-they don't die quickly."

A consultant who is less gloomy than most about 1991 is Edmund Greenslet of ESG Aviation Services, who thinks results for the U.S. industry "are likely to be better, maybe quite a bit better, than generally has been talked about. I think the industry could make a very respectable amount of money, approaching $1 billion." He bases his prediction on the fact that, "the supply/demand equation is arguing that fuel prices should be lower," even if war should break out in the Middle East, and that airlines may have raised fares higher than necessary to off set fuel prices. "I recognize we've got a recession and traffic is likely to be particularly weak," he says. "But even in the face of that, I think yields should be extraordinarily strong." And under this scenario, he expects most, if not all, of the troubled U.S. carriers to survive.

Greenslet sees cabotage as one of the big issues of the year. "Politically, it's probably a piece of cake in Washington," he says. It's seen as a way of increasing competition. it will start with British Airways and once it starts, it's going to be pretty hard to limit it. The question will be what trade-offs we get."

Iconoclast Mort Beyer of Avmark, Inc., thinks that, " 1 991 is going to be rough, and half the major carriers may no longer be among us when it's over, unless the Transportation and Justice Departments take a totally negative position because of antitrust implications. …

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