IATA has increased its 2010 forecast and is now predicting a $12.7 billion operating profit and 2.3% margin for the industry. This marks a pleasant turnaround from its previous outlook for an $8.2 billion operating profit and 1.6% margin. But, as always, this welcome and bright news must be kept in perspective.

In some parts of the world cyclical improvement is coming quicker than expected, but risks clearly remain. And while it is insightful to take a look at the bigger picture, the reality is that management are interested in their own actual and expected performance, as well as that of their competitors. At company level, forecasts reflect large numbers moving in different directions and there is sensitivity to small changes. But at industry level the size of the numbers is magnified.

The new IATA forecast continues to reflect the wide variation in expected performance between the various regions. In Asia, the strength of the economic recovery is evident in terms of traffic and revenue. In the USA, capacity has been cut to levels last seen in 2000 and yields are now rising. Meanwhile, over in Europe, net losses are forecast to offset anticipated combined profits for Latin and North America.

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Look back at last month's Chris Tarry column about consolidation here

But significant risks remain, whether they stem from the economic outlook or from oil prices, where future curves suggest a price of some $100 a barrel. Then there is the risk of capacity reintroduction - some 6% was taken out of the system through reduced utilisation. On top of this, there is the danger of a change in perspective, from "battening down the hatches" to "withstanding the storm" and then to one of "business as usual". This could lead to an adrenaline rush and a renewed quest for market share, which some observers will label as a "reversion to type".

Studying the IATA forecast in more detail, while revenue is now forecast to be some $62 billion greater than in 2009 - $23 billion up on the previous forecast - it is still $19 billion below 2008 levels. Meanwhile, costs for 2010 are expected to rise $49 billion year-on-year. On the plus side, the fuel bill for 2010 will be $49 billion lower than in 2008, but other costs are forecast to be $9 billion up on two years ago.

The new forecasts are based on a record 66.1% load factor, up from a previous 2001-2009 high of 63.3%, as well as a similarly unprecedented break-even load factor of 64.5% - also the highest this decade. Introducing more capacity may help "grow unit costs down", but this would be bad for load factors, yields and breakeven. Any breakdown in capacity discipline would clearly be negative for the industry.

Today there is an even greater need to distinguish between the cyclical and the structural. The danger is that the cyclical recovery might lead management to ease off on structural changes which just a few months ago appeared, not only necessary, but inescapable.

The last 18-24 months have been particularly challenging and, while cost reduction is never easy, a difficult operating environment helps along acceptance of the need for change.

However, most recent cost reduction programmes have been more focused on "gap closure" than anything more structural. Indeed, there is already anecdotal evidence that the speed of the recovery in at least some parts of the world has led to programmes with potential to structurally improve financial performance being abandoned.

Riding the upturn of the cycle is all well and good, but it is important to remember that the ability of any business to withstand the vagaries of a downturn is determined by the actions taken in the upturn. Against this background, there is a need to see programmes through to their finish and consider new initiatives to further strengthen the resilience of the business.

It is often suggested that people should "hope for the best, but plan for the worst" in a downturn. But this also applies against the background of an improving operating environment.

While the recovery may be underway, there is still a long way to go before most airlines approach attractive returns. And right now there are still significant self-inflicted risks, in addition to those over which management has no control. This could slow progress to airlines achieving necessary levels of return.

Source: Airline Business