But Some Analysts Think The Forecast Is Still Stormy
The CEO of the International Air Transport Association
expressed "cautious optimism" that the international airline
industry could see a return to profitability this year. Giovanni
Bisignani made the prediction in a speech to the World Air
Transport Summit and IATA General Meeting in Berlin, Germany on
Monday,
Bisignani said that global traffic has climbed back to
pre-recession levels with load factors nearing 80 percent, and that
the bottom line for many airlines continues to improve. "
Asia-Pacific is powering the upturn with $2.2 billion in profit,"
he said. "North American carriers will move into the black at $1.9
billion. Latin American airlines will return $900 million, the only
region with two consecutive profitable years."
"Middle Eastern and African carriers will each deliver profits
of $100 million," he continued. "But not all regions are recovering
equally. Europe with its weak economy will be the only region in
the red, with a $2.8 billion loss. But today we are upgrading our
global industry forecast to a full-year profit of $2.5 billion.
This is the first global profit since 2007. It is a reason to
celebrate. But with a margin of 0.5%, it will be a modest
party."
But, Bisignani said, there are still serious challenges to
be overcome. One is excess capacity. With fewer than half of the
1,340 aircraft expected to be delivered this year for replacement,
airlines should be more concerned with profit than market share, he
said.
He also pointed a finger at unions, saying "Labor, out of touch
with reality, is the next risk. We cannot pay salary increases with
our $47 billion in losses. Pilots and crew must come down to earth
and strikes at this time are shortsighted nonsense. Labor needs to
stop picketing and cooperate."
Taxes and the continuing volatility in the oil market will also
continue to put pressure on the airline industry, he said.
Bisignani (right) said he has a "2050" vision for the
future, that over the next 40 years, the success of the airline
industry will be built on profitability, infrastructure, a new
energy source, and the customer. He called on governments to take a
leadership role in streamlining infrastructure improvements like
new runways, as well as investing in biofuels. He also said that
"In just a couple of decades, the demographics of our customer base
will change dramatically. The middle class will nearly triple from
1.3 to 3.5 billion people. India and China will account for a
quarter of these potential travelers." Having the capacity to serve
that new customer base is key, Bisignani said, but the the answers
to how won't be found in "isolation."
But the IATA's CEO said that the future holds much promise. "Now
is the time to bring governments and partners on board to join us
in building our future," he said. "You can be confident that, as
always, your association is at your side, full of passion and
commitment. We will build a resilient industry on our cornerstones
of change. We will protect ourselves from cycles and shocks with
sustainable profitability. We will exceed our customers’
expectations and we will be an industry that is even safer, greener
and more successful."
But aviation analyst Frost & Sullivan said in a news release
Tuesday that the real picture is somewhat grimmer, and that the
linchpin will be fuel.
The analyst says that, should the Obama administration tighten
drilling regulations, there may be an oil shortage between 2016 and
2018, driving fuel costs above $100 per barrel. With fuel costs
representing roughly 40 percent of an airline's cost base, the same
detrimental impacts as seen in 2007 and 2008 can be expected, they
said.
As airlines attempt to control non-fuel related costs and
increase their revenue potential, they face resistance from labor
unions, especially of legacy airlines like British Airways,
Lufthansa and American Airlines. It is the legacy systems dating
from the 1980s that needs to change, as they are holding back the
development of the airline industry. As airlines tackle the labor
issues, there are other costs that can be saved and revenue
synergies established to create a buffer against the inevitable
challenges ahead.
The analyst says there are the typical airline alliances such as
Star Alliance and SkyTeam, bringing in as many members as possible
to create marketing and revenue synergies, and there are also cost
alliances, such as the first ever low cost airline alliance between
Air Asia and Jetstar. There are even partnerships across different
business models such as Virgin Blue with Air New Zealand, American
Airlines with JetBlue, and Jetstar with AirFrance-KLM. The future
of the airline industry will definitely include more consolidation.
It is the only way airlines will minimize cost and enhance revenue,
given the conditions in which the industry operates.
Acquisition strategies, such as Lufthansa's, whose present
portfolio includes Austrian, BMI, jetBlue and Swiss, together with
more partnerships and joint-ventures in certain markets, such as
the Delta-AirFrance KLM transatlantic joint-venture, will be key to
cost reduction and revenue enhancement.
Tight regulation is a major hindrance to the growth of the
airline industry, according to Frost & Sullivan. While an
increase in bilateral agreements, open skies policies, and the
creation of single-skies enhance the global economy, they also
create a better operating environment for the airline business.
However this process is slow and applies mostly to North America
and Europe. The emerging markets in India, China, and Southeast
Asia have yet to benefit from such changes. And even in North
America and Europe, these benefits may be tempered once strict
environmental regulations are imposed on the airline industry as
early as 2012.
With stricter environmental policies being enforced worldwide,
alternative fuels may provide a buffer for airlines taking part in
the emissions trading scheme. Alternative fuel for aircraft is a
challenge in its own right. The underlying problem is not whether
it is scientifically possible, but the commercial viability of the
alternative fuel to be produced on a commercial scale. Alternative
fuels may not be commercially viable for the airline industry for
another ten years, due to extensive regulatory approval
requirements. Counting on alternative fuel as the solution to
escalating fuel prices and environmental regulations is not
prudent.
The bottom line, according to Frost & Sullivan, is that
airlines need to continue reducing cost structures and enhancing
efficiency in order to meet changing market conditions.