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Market outlook: The airline white-knuckle ride

What a difference a year makes. Looking back twelve months or so ago, forecasts were becoming even more pessimistic. And yet we end 2010 with a full-year outcome set to exceed the last peak year.

Against this background, it is interesting to compare the findings of IATA's latest confidence survey with a year ago. Back then all but 8% of respondents had seen their profits decline over the previous three months, but almost three quarters thought they would see an increase over the next year. This time around, 77% have seen profit growth over the most recent quarter, while 15% remained stable and only 8% saw a decline. Looking ahead, some 60% expect further growth over the coming year.

Turning the focus to passenger yields, a year ago all of the airlines surveyed had seen declines against the previous quarter. A year on, some 40% had experienced a quarterly fall, but most of the rest saw an increase. Views for the future have also shifted. In 2009 almost 47% expected yields to go up in 2010 and just over a quarter predicted no change. Today things have flipped. Almost 60% expect stability and just over a quarter expect an increase.

The evolving unit cost picture is also reflected in the findings. Last year just over 50% thought unit costs would be flat or up, but today almost 70% share this opinion. Roughly translated, it is unlikely there will be a straight line from the last trough to the next peak.

Some analysts have brought forward their mid-cycle expectations to 2011, suggesting not only a very short duration cycle in prospect, but also a complete turnaround from the widely held view in 2006/7 that we were in some sort of "super-cycle" duration.

Analyst recommendations reflect their confidence in company performance. Also, markets look forward, rather than backwards, so recommendations should reflect expectations. But equally markets are particularly unforgiving if a company disappoints and there has been evidence of this over the last year too.

Using data from, we selected a sample of airlines in Asia, Europe, North America and Latin America and compared recommendations from a year ago with those now - particularly the percentage of "outperform" or "buy". It is worth stressing, however, that there are a range of factors which impact share prices.

A year ago the carrier with the greatest percentage of positive recommendations was United/Continental Airlines, with 77% as buy or outperform. TAM was on the flip side of the scale, with the lowest percentage at just 21%. The average was 46%.

In Asia, Qantas came out on top with 62%. Next was Cathay with 55%, then 41% for AirAsia and 30% for Singapore Airlines. Over in Europe, 55% of easyJet's recommendations were positive. British Airways and Lufthansa both hit 48%, Ryanair came in at 42%, and Air France/KLM had 38%.

Airline share prices have been on a roller-coaster ride, but some have moved in a more or less upward trend. United Airlines/Continental saw a 152% hike, against a year ago. Similarly, Air Asia's shares were up 121%, LAN posted 84% growth and Cathay Pacific posted a 66% rise. Elsewhere, but not in a straightish line, Lufthansa was up 48%, BA by 37% and Air France by 27%.

On the low-cost front, Ryanair's shares have risen 26% on a year ago, but they are almost 10% below their 12-month peak. Likewise, easyJet was up 18% but close to 15% below peak. And, although US airlines reported their highest ever operating profits in the third quarter, AMR's shares were 11% up, but 26% below peak. In Asia, SIA's shares rose by 16%, just 5% down on peak, and Qantas' by some 6% or 11% below peak.

These historic recommendations and share prices are now in the past and today the percentage of positive recommendations for the same sample lies in a range of 53% (AMR) and 95% (Singapore), with a 72% average. Qantas scores 92%, with United/Continental at 85%, Air France-KLM and GOL at 79% and AirAsia at 77%.

Inevitably the outlook is more positive than it was twelve months ago, but generalisations are dangerous, camouflaging the performance of individual businesses.

With the majority of analysts being positive, there is huge scope for disappointment. And the fact that only 60% - and not 100% - of airline managers expect profits to increase over the next year is something to consider at this time of year, known for contemplation and reflection.

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