Analysis of the latest full-year results of the world's biggest airlines presents a grim picture. The top 50 airline rankings from our sister publications Airline Business and Air Transport Intelligence shows what a mountain the majors must climb to recover their fortunes

The world's worst aviation crisis in history has left the world's 50 biggest airlines nursing combined net losses of more than $9 billion. Although 31 of them reported net profits in 2002, several North American airlines in particular - including American Airlines parent AMR and United Airlines - made spectacular losses, haemorrhaging, in both these cases, almost $10 million each every day.

The latest airline financial rankings - assembled by our sister magazine Airline Business and sister online information service Air Transport Intelligence - make sorry reading. Although the combined losses for the last full calendar year are slightly down on 2001, if anything 2003 is likely to be worse, due to the faltering recovery and the collapse in passenger numbers in the early part of the year because of the Iraq war and SARS outbreak. The latter hit carriers such as Singapore Airlines, Cathay Pacific and Thai Airways International, which survived unscathed the effects of 11 September and were among a handful of airlines that saw their profits soar in 2002.

Eight of the top 15 airlines are North American. All of them lost money in 2002, their combined deficit totalling more than $8 billion. Two of them, United and US Airways, entered Chapter 11 bankruptcy protection during the year. Although US Airways has emerged, the position of United still looks bleak and Air Canada followed them into Canada's equivalent of Chapter 11 in 2003. Further down the list, other North American carriers, such as Alaska Air Group, America West and ATA also reported in red ink. The only airlines in the top 50 in North America to make a profit in 2002 were three freight specialists, Airborne Express, FedEx Express and UPS Airlines, and low-cost Southwest Airlines.

Two-year wait

However, the situation may be improving in 2003. According to JP Morgan analyst Chris Avery, rising traffic is finally boosting yields. "The USA appears to be recovering," he says. "We are forecasting that US airlines will be making a net profit by 2005." That still leaves two more full years of losses and, for some, including United, the wait may be too long. Peter Morris, chief economist with the International Air Transport Association, does not believe the carrier has done enough to cut its costs, which, despite its spell in Chapter 11, remain perilously high. "Chapter 11 can do strange things to balance sheets - and to management thinking," he says.

In Europe, the picture in 2002 was better, although half-year results from 2003 indicate that most of the majors are far from out of the woods. With a high dependence on transatlantic traffic, the big three European carriers - Air France, British Airways and Lufthansa - were badly hit by 11 September, but responded quickly with cuts in capacity and costs and all made modest profits in 2002. Combined, the 13 European members of the top 50 clocked up net profits of $276 million. However, the picture was mixed: Dutch flag carrier KLM lost $416 million and Swiss International Air Lines - still trying to get its strategy right after succeeding the collapsed Swissair last year - was $635 million in deficit. Many experts expect a further consolidation, spurred by the "almost" merger of Air France and KLM and Swiss's recruitment to the Oneworld alliance, which would leave most of the medium and smaller airlines in a much tighter relationship with one of the big three. However, bilateral treaties with the USA and competition concerns remain a stumbling block to full-scale consolidation, and other long-established flag carriers seem certain to follow Sabena and Swissair into the history books, as competition on key hub traffic drives weaker players out of business.

Only in the Asia-Pacific, pre-SARS, did the airlines have something to celebrate last year (although the Bali nightclub bombing late in the year proved that this region is by no means exempt from the sort of hyper-terrorism that can overnight reverse economic fortunes). Air China, Cathay Pacific, China Airlines, China Eastern, China Southern, Eva Air, Japan Airlines System, Korean Air, Malaysia Airlines, Qantas, Singapore Airlines and Thai Airways International were all in the black in 2002. The only regional exception in the top 50 was Air New Zealand, whose chances of regaining financial stability were dealt another blow this year with the turning down by the competition authorities of its attempt to co-operate on trans-Tasman traffic with its Australian counterpart Qantas.

The overall shape of the top 50 has not changed much since last year. Ranked purely by revenues, Japan Airlines, which merged with Japan Air System, has vaulted four places to number two in the world behind American Airlines, almost swapping places with United. Dropping out of the list are DHL Airways (number 44 last year) and Aer Lingus (number 50 in 2002), while squeezing in are Swiss (31), Israel's El Al (44) and TAP Air Portugal (50). It will be interesting to see whether fast-growing European low-cost specialists EasyJet and Ryanair make an appearance in next year's rankings. Both have swallowed competitors in the past year - Go and Buzz respectively - and EasyJet has more aircraft on order than any other airline. Their lower fare structures impinge on their revenues, but both carriers have been highly profitable (although EasyJet hit a bump earlier this year).

Despite its headline low fares, Ryanair has the most enviable operating margins in the business - at 31% - and is the 25th largest airline in the world in terms of passengers carried in 2002. US low-cost JetBlue will also feel compensated for still being well outside the top 50 by raking up operating margins of nearly 17%.

Reducing orders

Swiss's problems are perhaps transparent in its 2002 orders tally. Its order book of 74 aircraft - half the total size of its existing fleet - has been ramped back severely in 2003 and it has decided not to be the launch customer for the Embraer 170. Also struggling with aircraft numbers are several of the US majors, as they try to match capacity to reduced demand. The 2002 figures show American Airlines cutting its active fleet from 865 aircraft to 806, while US Airways went from 327 to 263. While some more modern aircraft are being put into storage, the extended downturn has sealed the fate of some older models, with US Airways disposing of its McDonnell Douglas DC-9s and Boeing MD-80s. In South America, Brazilian flag carrier Varig's merger with compatriot TAM should see it jump up the table from its current 40th spot. However, the airline's financial problems run deep. Aside from losing $454 million in 2002, the carrier has cancelled orders for Boeing 737-800s and has furloughed 15 aircraft, mostly older 737s.

The passenger rankings tell a very different story to the rankings by revenue. With the cargo carriers excluded for obvious reasons, US airlines - American, United, Delta and Northwest - take the top four positions. That is not surprising, given European carriers' higher dependence on long-haul passengers. In all cases, however, except Delta, where passenger numbers were flat, passenger numbers fell. Southwest, however, bucked the trend with a 2% increase in passengers. It is ranked 12th in the passenger tables, compared with 18 in the revenue ranking.

Last year was essentially a year of two halves. After taking action to reduce costs and capacity after 11 September, 2002 actually began on quite an optimistic note. Following the quick and successful war in Afghanistan, Airbus chief operating officer John Leahy felt confident enough to declare at the Asian Aerospace show in February: "We are seeing definite recovery. Traffic and yields are coming back." Half a year later, the outlook had changed. Faced with stagnant economies in the USA and Europe, the International Monetary Fund was stating by the end of the year that "the pace of recovery has slowed industrial production has stagnated", and it duly revised its growth predictions for 2003.


Many airlines went into this year believing that 2003 would be worse than 2002 and some first half results have borne that out. However, in the second half of this year there have been encouraging signs of the US stock market and economy recovering and that the bottom of the trough has at least been reached. Despite this, the worry for manufacturers is that capacity will be filled by returning furloughed aircraft to service rather than acquiring new ones. There is another more fundamental concern. Without far-reaching reform, both to the way US airlines in particular are run, and transatlantic flying rights, the major airlines could struggle to return to profit even once passenger numbers return. Not only will airlines be tempted to push for market share at the expense of yields - as British Airways and Lufthansa have both done, according to Chris Avery - but economies and efficiencies brought in during difficult times will be eroded as employees demand better pay and conditions. Martin Borghetto, airline analyst at Morgan Stanley, argues that streamlined working practices will break down and "staff try to claw back some of the lost benefits when earnings start to rise again". It could be that the world's major airlines will find paying back that $9 billion deficit harder than they might imagine.

Source: Flight International