How quickly the picture can change. A year ago talk of recovery, at least outside Asia, was still laced as much with optimism as solid numbers. But the recovery among airlines has gone beyond expectations. And while serious concerns remain in Europe and the USA about the recovery's sustainability, in the last quarter airlines across the globe were back making money.
A glance through the figures for the three months ending 30 September makes healthy reading. Figures available for a mix of 27 Asian, European and US airlines show collective operating profits of $8.5 billion for the quarter. A year earlier, the same airlines' profits barely passed the $1 billion mark for the quarter.
Asia has seen the most marked recovery and if it was cautious optimism in 2009, there is now nothing tentative about the positivity felt by airlines in the Asia Pacific region. With Asian carriers posting traffic growth every month this year, the outlook for 2011 is bright, the Association of Asia Pacific Airlines director general Andrew Herdman said during its recent annual assembly of presidents in Brunei Darussalam. "Asian economies have recovered from the global recession at a rapid pace and this has resulted in a tremendous boost to carriers across the region," he says.
Passenger traffic grew 9% among AAPA member airlines and eight non-member carriers in September, continuing the trend evident since January. International cargo traffic was up 18.5%.
Buoyed by the strong rebound in passenger and cargo traffic so far this year, carriers are confident growth will continue into 2011. "With many powerful economies across Asia recording high GDP growth rates and leading the world out of recession, the region's airlines have seen passenger and cargo traffic rapidly rebound to levels beyond those achieved before the recession hit," says AAPA. "The rapid return of business confidence has also resulted in strong demand for premium-class seats, a sector in which Asia's highly passenger service-focused carriers have traditionally excelled."
As a result AAPA member airlines are looking forward to closing this year on a strong footing. South Korea's Asiana Airlines, for example, is set to return to the black this year, after posting two straight years of losses in 2008 and 2009. Previously, it had said it could drop unprofitable routes to stem losses, but the airline is now seeking to add more routes, says Asiana chief executive Young-Doo Yoon.
Even as carriers look forward to starting 2011 with a positive forecast of growth in the industry, AAPA cautions challenges remain ahead. Among these are heavy taxation, compliance by authorities with safety standards and regulators' responses to security incidents.
Specifically, AAPA hits out at what it calls "knee jerk reactions" by regulators over safety threats, such as the recent incident in which explosive devices were found on cargo aircraft. "Security comes at a cost, already measured in tens of billions of dollars annually for aviation alone, and new security procedures are only justified when it can be demonstrated that the benefits outweigh the additional burdens they impose on society," says Herdman.
In North America, record profits by US carriers are largely being met with tempered optimism as the industry waits to assess if this business cycle is in fact different from past episodes when capacity discipline eroded.
All the US major and low-cost carriers were profitable during the last quarter, including American, which posted its first profitable quarter in three years. The phrases "record profits" and "what a difference a year makes" abounded among carrier chiefs.
CAPACITY GRIP
The momentum is expected to carry on into the fourth quarter and some analysts are raising their profit estimates. For example, CRT Capital Group's Michael Derchin is doubling the company's net profit forecast for the fourth quarter for all the US majors, JetBlue, Alaska, AirTran and Southwest to $269 million.
But amid the optimism, carriers seem committed to a capacity discipline and balance sheet rejuvenation that were both absent in past business cycles.
Calling the third quarter results a "watershed event", US Airways chief executive Doug Parker cites an economy "that's slowly and begrudgingly pulling out of a recession, yet the airline industry is recording record near profits". But he cautions: "That's not to say we're done. We need to prove to our investors and ourselves that this is real and sustainable."
Delta has been stressing discipline for some time as it retains its steely focus on de-leveraging its balance sheet. The carrier's president Ed Bastian believes it is difficult to execute a balance sheet clean-up if you are "out there growing capacity".
Derchin of CRT Capital believes overall capacity remains under control, but bears watching if demand slows. Even though CRT raised its 2011 US domestic capacity estimates to 3% from 2%, "we do not view the higher capacity growth to be a significant problem at present". He says most of the increase is represented by using existing aircraft and adding fewer new examples to fleets.
The focus on de-leveraging balance sheets should not be under-appreciated, Derchin says. Delta remains on a course to cut its net debt to $10 billion by the end of 2012, and he believes United-Continental will follow suit "to dramatically restructure its balance sheet as well".
Delta chief executive Richard Anderson stresses that despite strong operating results, debt reduction is one of its highest priorities. "We have more work to do to get the business to a place where it is consistently profitable in generating 10-12% operating margins on an annual basis".
In Europe, the only region IATA currently expects to stay in the red this year, operating profits from the nine carriers listed below jumped to $2.7 billion as revenues grew more than one-fifth. And while low-cost carriers contribute significantly to this profitability, the last quarter has seen either a return to profit or much improved profit for many of the region's network carriers.
British Airways, for example, turned round a small operating loss for the third quarter last year with a $576 million profit. But its trading outlook sums up the tentative position that remains. "While positive, the economic environment continues to be subject to uncertainty," it says.
Source: Airline Business
