Kevin O'Toole/Business Editor

THE WORLD AIRLINE INDUSTRY finally shook off the recession in 1995, to produce what are likely to be the highest profits on record. Barring unforeseen disasters, the industry should continue to forge ahead in 1996.

The figures have yet to be collated for 1995, but the best guess from the International Air Transport Association (IATA) suggests that carriers could be on course for a net profit of better than $5 billion, on their international services.

If true, that will be a best-ever performance and go some way towards offsetting the $16 billion lost during the four years of recession. In short, the cycle has turned, but the celebrations come with a note of caution.

Although demand has recovered, putting international passenger volumes back on a robust long-term growth rate of around 5% a year, the real success has been in damping down the excess capacity which plagued the industry throughout the recession. A renewed round of optimistic aircraft ordering could yet spoil the good work, but none is yet in evidence. Preliminary year-end figures from the International Civil Aviation Organisation suggest that passenger traffic grew by 7%, a comfortable percentage point ahead of capacity growth.

Yields, too, have recovered a little of their poise during 1995, but no-one is questioning that the underlying trend is for continuing long-term decline, albeit at a slower pace. Again, the trick has been to keep unit costs falling faster.

The US industry is a prime example. The major network carriers, which only a year or two ago were still heading the list of the world's largest loss-makers, will emerge from 1995 with collective net corporate profits of around $1.5 billion.

The transformation comes not from a leap in demand - traffic and capacity have remained static throughout the 12 months - but from a dramatic rebalancing of the cost-yield equation.



As the results of cost-cutting programmes feed through in earnest during 1996, expect to see further gains, with Delta Airlines tipped as a favourite to lead the pack. Also watch for repercussions, if and when Delta launches its new low-cost service to take on the likes of ValuJet Airlines.

With recovery in place, the industry seems intent on a renewed attempt at rationalisation. Although United Airlines ultimately decided against a bid for USAir, the very prospect was enough to spark off a new round of strategic planning. Experience suggests that it would take only one major move to kick-start a wave of merger activity.

Also expect the re-emergent US airlines to make their presence felt elsewhere around the world, including the stepping up of pressure for greater access to overseas air markets.

There are signs of re-alignments to come across the Atlantic. The interest surrounding USAir has opened up possibilities for British Airways to explore the options for an expanded alliance, while, on the US side, American Airlines has an obvious lack of partners.

As a background, the UK-US bilateral talks will have to restart, with a few tantalising hints that the UK may eventually be prepared to offer something more imaginative than the caution of its "phased" approach towards liberalisation. Admittedly, BA's talk of a new "bold" initiative is, as yet, just talk.

KLM has some fence mending to do with its partner, Northwest Airlines, after the boardroom tussles during the past year. The Dutch carrier may also restart the search for greater scale within Europe. Speculation has been rife about possible talks with BA and others, although they have so far met with flat denials from KLM.

While BA, KLM, Lufthansa and others continue to consolidate their record performances of 1995, the southern European carriers continue to struggle to complete their restructuring before the psychologically important 1997 deadline for completion of the single air market.

Alitalia should finally resolve its problems in 1996, perhaps including an injection of private capital. As the Iberia experience has shown, the European Commission is no longer in a mood simply to wave through state aid. Alitalia, like Iberia, is no doubt hoping that its recapitalisation will be seen as a commercial transaction rather than just a Government handout.

Asia's flag carriers may also have some re-assessing to do in 1996. Although the region's traffic is still on course to show the world's fastest growth rates, competition, too, is growing at a heady rate.

A formidable volume of new capacity is scheduled to join the fleet over the next couple of years or so, while, at the same time, a second tier of national carriers is emerging to challenge the region's traditional flag carriers. The net result is certain to be a continued impact on yields. Inflation and rising currencies will not help.

Source: Flight International