For the US airline industry, 1996 looks set to be a year when the word 'management' is finally used without the word 'crisis' coming before it.

After a full year of profits in 1995 - the first for the industry's major players since 1989 - stability seems to have taken hold. This should continue in 1996, with some analysts expecting profits to go well beyond the $2 billion mark. Though this probably does not mean an end to the loss-profit cycle for airlines, the industry trends are of long-term debt paydown, the meshing of low-fare and high value-added airline product offerings, potential domestic mergers, and a growing depth to international alliances. All this suggests carriers are attempting to make the next downturn less severe than the last one.

US carriers have finally begun to achieve a balance between supply and demand - a rudimentary task in other sectors, but for airlines a relatively rare phenomenon. Expenses have fallen after a year when fuel was at its cheapest in nearly a decade and cost-cutting programmes - including the capping of travel agent commissions - began to show real benefits. Also, on the revenue side, controlled capacity growth meant that yields actually grew.

It was clear that pricing stability would be attainable for US carriers by last October, when yield was 8.1 per cent ahead of the same month of 1984, and 2.1 per cent ahead of 1993. Fare wars were scant in 1995 and, barring a general recession, this trend should continue through 1996.

Attesting to the recovery in yields for US carriers was the fact that in 1995, the profit resurgence was driven primarily by domestic operations. In the third quarter, major airlines posted a $1.4 billion operating profit in the US domestic market, compared to an international system contribution of $850 million. Compared to the third quarter 1994, this represents an 84 per cent increase in domestic profit and a 27 per cent improvement in the international result. With 1996 capacity again being held in check - analysts expect no more than a 3 per cent increase - most think this will persist.

Whether the yield trend continues depends on various factors, including how much of the US airline industry will enter the low-fare fray. Until the end of 1995, low costs and low fares were essentially the purview of Southwest Airlines and ValuJet, the only large-carrier exception being United Airlines. But Delta Air Lines' agreement with its pilots to initiate short-haul, low-fare flying will, if it is implemented, encourage other airlines like American to follow suit. This restructuring could further erode the distinction between low-cost and full-service airline products in the US. The originator of the 'Southwest effect' may even have to redefine itself.

Whether or not the larger players enter the low-fare, short-haul market, the main battleground in 1996 will be the US east coast. A seat-to-seat battle between Delta and ValuJet at Atlanta appears to be brewing, while the latter continues its explosive growth in places such as Washington/Dulles and Boston. Southwest made a major entry into Florida in January, while a plethora of smaller players like Kiwi, Air South and Midway play in the same league.

The most direct loser in all this is USAir. Its failed attempt last year to sell itself to United could simply be an opening gambit to find a domestic merger partner. With such a battle being waged so forcefully in its home region, USAir's future may well be decided in 1996; attempts to squeeze concessions out of its reluctant unions will be the top priority of the carrier's new management. If the airline does look for other suitors, the result could be asset sales rather than a merger.

Many agree that the list of potential 'agents of consolidation' in the US is not limited to USAir: TWA, Alaska Air and Continental are often bandied about as potential targets for mergers. Northwest was mentioned too, hence the poison pill which has damaged relations with its partner, KLM.

Certainly, consolidation has been forecast with such ferocity it seems that some people are simply hoping for a self-fulfilling prophecy to occur. But even with no major mergers, sell-offs or liquidations, there will still be plenty to make 1996 an interesting year.

For instance, the US will continue to attempt to resolve major bilateral hurdles with Japan, Germany and the UK. Due to its being a presidential election year, some believe the always contentious issue of getting more access for US carriers at London/Heathrow will not show much progress. Passenger service negotiations with Japan will be totally dependent on the slow-moving cargo talks the two countries had hoped could be concluded quickly. As for Germany, the US hopes that its push for establishing an open skies agreement will produce results.

If the US and Germany negotiate open skies, it will be because Lufthansa and United have lobbied hard for an agreement and its expected result: the granting of anti-trust immunity for their alliance. Following the expected approval of antitrust immunity for Delta-Swissair-Austrian-Sabena, and, perhaps, American-Canadian International, US officials will be hard pressed not to approve United-Lufthansa.

Mead Jennings

Source: Airline Business