Airline profits may be at an all-time high but can the industry keep them there?

It's just déjà vu all over again. So a disillusioned sportsman is said to have remarked on seeing his team once again collapse to defeat. There may be more than a few in the airline industry around the world who can share the sentiment as the briefest of booms is already showing signs of disintegration.

Quite apart from the unfolding economic turmoil in the Asia-Pacific region, and the risk that it will now spill over into rest of the world, there are all the familiar hallmarks of a cycle about to turn. Among them are rising aircraft deliveries (expected to peak around the middle of next year) and easing traffic growth.

The question now is whether the industry can break with its history and avoid the inevitable tailspin that has accompanied every previous cycle.

Even during the boom, the industry's performance has been less than convincing - as shown by a closer study of the Top 100 airline rankings published in this issue. The headline profits may be setting industry records, but by most investment standards a collective net margin of little more than 3 per cent is hardly impressive at the best of times. At the height of a boom it is poor. Even the industry's operating margin of 6.5 per cent would need to double.

Admittedly, the figures have been pulled down by turmoil in the Asia-Pacific region, which narrowly kept its head above break-even.But the excuse should not be taken too far. Despite the efforts of stalwart profit-makers like Cathay Pacific and Singapore Airlines, the region has rarely produced better than a modest net return, despite its huge potential. Neither had the worst of the downturn yet shown through in last year's figures. That still awaits for 1998, with Cathay's first ever interim loss sounding an early warning shot.

Europe's margins too remained a lacklustre 3 per cent despite a year of impressive traffic figures and some dramatic turnarounds among the perennial state-owned loss-makers. Even at operating level the best performers failed to push the margin into double figures, leaving the Association of European Airlines to conclude that its members appear to have run up against a "natural constraint" - including, no doubt, the burden of massive infrastructure costs.

They may do well to look to the US industry where the majors and most of their dedicated feeders have now broken through that ceiling, turning in operating margins in double digits or close. Clearly an unprecedented run of economic growth has helped. But that has been accompanied by a heavy mix of cost-cutting, capacity constraint and consolidation. In short, the industry appears to have emerged from its post-deregulation blood-letting not only leaner but a little wiser. The next test will be whether this new resolve survives into the next market downturn and whether carriers in other regions are prepared to follow suit.

The real sign that the cycle has been broken will come, not from the industry's ability to make a killing in the boom times, but its ability to make a modest profit during the bust.

Source: Airline Business