Forecasts for the year ahead still remain hazy, overshadowed by uncertainties over the fuel price, but the expectation is for more of the same from the main markets of North America, Europe and Asia-Pacific. In that order they will generally be bad, middling and good.

The most optimistic hope that fuel prices will fall back significantly from the painful $50 per barrel levels, for economic activity to bubble along nicely and for traffic growth to follow suit. "It would be good to have a year of clear air," says Chris Avery, a senior analyst at JP Morgan's London office. "We are praying the industry doesn't have any more apocalyptic events."

Travel demand, at least, appears strong. ICAO expects world airline passenger traffic to expand at 5.4% this year and next. IATA too is optimistic, expecting international traffic to grow at 5.9% over 2005. That is down on 2004 growth rates, expected to come in at 14%, although at least five five points of that rise represents a one-off rebound from the crisis that followed the SARS epidemic. Nevertheless, 2004 was an "exceptional year", says IATA chief economist Brian Pearce.

Soaring fuel bill

But many uncertainties remain, not least the future price of jet fuel. With oil hikes feeding straight through to the industry's bottom line, the fuel issue blighted last year's performance. Excluding the increase in fuel costs, the industry has actually achieved a "normal" cyclical recovery in profitability, says Pearce. One consolation so far, he adds, is that the rise in oil prices has not damaged traffic growth.

IATA estimates the industry's fuel bill rose by $15 billion last year. This represented 18% of operating expenses, a rise of five percentage points in two years. So, despite carriers cutting non-fuel unit costs by 3% in 2004, an improvement over the 2.5% cut in 2003, the association expects its members to make a net loss of $4.8 billion for the year. Based on the average oil price dipping to $34 per barrel, and with another 2.5% fall in non-fuel costs, IATA is forecasting a small net profit of $1.2 billion for the year ahead, says Pearce.

Some analysts believe fuel prices will fall. JP Morgan, for instance, is forecasting $35 per barrel by mid-year, while ABN Amro predicts an average price of $36-38 over the year. But there is no real certainty.

Vaughn Cordle, a financial analyst and pilot who runs Washington-based Airline Forecasts, says that the 13 major US carriers would probably lose $3 billion this year if oil remains at $45 a barrel and costs hold at about their current level. If oil falls to the $35 range, he predicts, that would amount to a $3.4 billion windfall to the industry and in effect a breakeven year.

But such a slide in fuel costs is not universally expected, despite some year-end fluctuations in crude oil prices. Fitch Ratings senior analyst Bill Warlick sees oil possibly exceeding $40 a barrel, which translates into per gallon prices of $1.20 and up. Southwest Airlines, the sole US carrier that is heavily hedged with 80% of 2005 fuel locked in at about $28 a barrel, is also the only US major that can generate real cash flow in a $40 per barrel oil environment.

Some analysts see a silver lining in the oil-price tornado: if fuel stays in the stratospheric range, the resulting price shock could accelerate industry restructuring by forcing troubled US Airways to liquidate, possibly by February. If US Airways shuts down before it can survive into the positive cash flow season that starts in March, it would take about 6% out of the system, says Warlick. Ray Neidl at Calyon Securities thinks that would be a salve to the industry, but few believe that even a US Airways closure would end the need for further cost cuts.

US yield erosion

Cordle, a sceptic about industry prospects, notes that if yields are the key, the outlook is not very encouraging. Latest figures for October show that yields were down by about a quarter for business travel compared with October 2000, while leisure fares were down by almost 35%, he says, citing research his firm has performed for corporate clients.

An American Express unit, Eclipse Advisors, found late last year that corporate travel departments are paying the lowest average airfares since 1999 as low-cost carriers shape pricing across the US industry. Average domestic fares were $217, compared with $243 in 1999, when Amex began taking the measurements. So 2005 will still be grim for the US majors, with any chance at breaking even postponed until 2006. UBS analyst Robert Ashcroft thinks that it will not be until 2007 before the industry has its next prospects of decent earnings.

Despite fuel costs, Europe's majors and low-cost players easyJet and Ryanair were profitable last year. The main exception was loss-making Alitalia. Avery of JP Morgan expects even better results for this year and next. But analysts are nervous about the possibility of economic slowdown. "Network airlines are very sensitive to the rate of economic growth," says Avery. Any slowdown will put today's forecasts, which are based on gentle economic growth, at risk. "Everyone is expecting a slowdown in economic growth," says IATA's Pearce, with US interest rates rising and the economy there slowing. China has also shown signs of overheating, he notes.

There is also a live debate over what effect a slowdown will have on the transatlantic market, says Andrew Lobbenberg, an airline analyst for ABN Amro in London. US carriers have announced capacity rises of 15% on transatlantic routes for the coming summer. "If the economy slows down, excess capacity from the US carriers will really dent hopes on the North Atlantic."

Such uncertainty is unfamiliar to Asia-Pacific carriers. After a SARS affected 2003, most bounced back last year and are expected to perform well once again in 2005. "After a year of strong economic growth, prospects for 2005 appear to be reasonably good," the Association of Asia Pacific Airlines said at its recent meeting of member airlines in Taipei. Demand for Asian air travel has not fallen as a result of the introduction of fuel surcharges, while cargo demand also remains healthy as economic conditions remain good overall.

Asian pressure points

However, Auckland-based airline analyst with UBS, Timothy Ross, expects slower traffic growth for Asian airlines in 2005, although the region's carriers will continue to outperform their US or European counterparts. One specific concern is the amount of passenger capacity coming into Asia from airlines outside the region looking to focus on this higher-growth area. He says pressure on load factors is already being seen.

Additional capacity will also come from low-cost airlines, which will become bigger players in 2005. The emerging low-cost market "grabbed headlines" in 2004, says Ross, "but in reality there was very little to be seen on the airport tarmacs" in the region.

In some markets that is changing fast. Singapore, for example, is seeing a host of new players. Singapore Airlines says of the year ahead that "escalating fuel prices and greater competition will pose significant challenges for airlines", adding that "competition on regional routes will intensify and yields will come under more pressure as a result".

The weak US dollar will also continue to have some impact, says Ross, as will high fuel prices. While Asian airlines have generally been able to cope with high fuel costs as demand has held up despite the introduction of surcharges, Ross expects that "jet fuel surcharges themselves are unlikely to make it past their first anniversary". If governments do not allow surcharges to remain and airlines are forced to increase ticket prices, he adds, this may result in a drop in demand.

While the outlook remains hazy as far as fuel prices and economic conditions go, carriers need to sustain unwavering efforts at addressing their cost base. "The fundamental issue is how to get high labour costs down," says Chris Tarry of the CTAIRA consultancy. Pearce of IATA agrees: "Carriers are still not structurally there yet."  

ICAO schedule passenger traffic forecast 2004-6

Airline region Ten year traffic RPK billion 1993-2003 2004  Short term growth forecast





RPK bn












Asia/ Pacific
















Middle East








North America








Latin America
















Note: ICAO forecasts released September 2004. RPK=revenue passenger km Latin America inc Caribbean

Source: Airline Business