After the lows of 2008 and 2009, airlines were ready to ride an up curve. But the extent and pace at which fortunes recovered could hardly have been anticipated. Revenues and profits among the 150 biggest carriers in 2010 by turnover did not just return. They reached record highs.
Combined revenues for the 150 biggest airlines in the latest Airline Business World Airline Rankings reached $588 billion. This is a jump of $78 billion on 2009 the largest yearly improvement since the rankings began. It means airline revenues among the largest operators have rebounded beyond the previous high of 2008 and more than recovered the 11% slump in revenues seen in 2009.
Total operating profits too combined to jump from virtually nothing to reach $32.4 billion outstripping the previous operating profit high of $29 billion seen in 2007.
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Central to the strong 2010 was fast-growing economic activity, notably in the growth engine regions of Asia and Latin America, which were already recovering in the back-end of 2009. Asia-Pacific carriers led the way in revenue gains for 2010 and were among the most profitable. While growth was widespread, China was at the forefront. Three mainland Chinese carriers joined Cathay Pacific in the top 20 airlines by revenue for 2010. Just two years ago, Cathay was on its own. Indeed one of these carriers, Air China, is on the cusp of breaking into the top ten.
Gulf giant Emirates did break into the top ten operators by revenue for the first time - 25 years since its launch. It illustrates the continued expansion of carriers in the region.
Other factors also helped the airline performances. US carriers reaped yield benefits from tight capacity discipline initially brought in to temper higher fuel costs. The relatively strong pick-up in corporate activity if not consumer confidence helped long-haul premium demand recover. Consequently, network carriers, even where economic concerns remain, were able to lift revenues last year.
Mergers continue to play out among the top tier. The combination of top ten carriers United Airlines and Continental saw it overhaul Delta Air Lines as the second largest airline group the latter having itself jumped in 2009 following its merger with Northwest. The long-awaited merger of British Airways and Iberia, ranked nine and 22 respectively in 2009, sees International Airlines Group cement a place in the top ten, while the rapid rise of Air China and China Eastern was accelerated by acquisition moves for Shenzhen Airlines and Shanghai Airlines.
This year's tie-up between US low-cost carriers Southwest and AirTran would all but see the first no frills carrier break into the top ten by revenues based on 2010 levels. It demonstrates the continued rise of low-cost carriers continues, be they traditional low-fare models or middle-ground occupying hybrid carnations. A fifth of carrier groups in the top 150 are now from this sector.
But for all the pluses of 2010, the challenge is retaining the hard-won gains. Renewed fuel price volatility, continuing concerns over the robustness of the economic recovery, demand shocks from natural disasters and political unrest have put the pressure back on.
Already it seems clear this year will not be as profitable. IATA has twice downgraded its profits forecast this year and it expects the industry to make less than a quarter of the profit recorded in 2010.
Fuel is the big factor. After the relative respite of 2010, the barrel price of Brent Crude oil passed the $100 mark in February and has not fallen back since.
This time around, airlines are better prepared. The rise has been less rapid and pronounced, airline fleets modernised and more a benign revenue environment means gives higher fares a chance to stick. But higher fuel bills still equate to increased costs, and low consumer demand in many regions, makes it harder to recover additional fuel costs among leisure travel.
While fuel price development, economic activity and political stability will ultimately be the keys to airline fortunes, much may also hinge on how carriers' approach capacity. Airlines took a pretty disciplined line on capacity during the recent crisis and kept a tight grip as fortunes improved. This helped keep aircraft full and lift yields.
But capacity has been running ahead of demand again, exacerbated by the impact of demands shocks from natural disasters and political turmoil. And new aircraft capacity is coming on stream. IATA estimates more than 1,300 mainline aircraft scheduled for delivery this year, but with little sign so far of a corresponding acceleration in aircraft storage or retirements.
North American carriers were among the most profitable last year. Delta, United-Continental, FedEx Express, Southwest Airlines and US Airways featured in the leading 15 carrier groups by operating profit last year, and the region as a whole is behind only Asia-Pacific in securing operating profits of $10 billion.Perhaps Delta chief executive Richard Anderson captures the sentiment of the US airline industry when he says: "This isn't a hobby."
Anderson and his counterparts at US network carriers are exhibiting a focus on a disciplinary business model not seen, with any viable consistency, since deregulation. After battling skyrocketing fuel prices in 2008, followed by the economic downturn that is still reverberating across the globe, US carriers have been forced into action to overhaul their thinking during the last three years.
Since then, airlines have worked hard to restructure themselves and de-lever their balance sheets, says Massachusetts Institute of Technology airline analyst William Swelbar, after capital became increasingly scarce during the downturn. If carriers by chance gained some modest success in accessing capital, Swelbar points they were left with "poor collateral" to pledge.
While no company celebrates billions of dollars resting on its balance sheet, Delta has whittled down its adjusted net debt by $2.5 billion from $17 billion at year-end 2009 to $14.5 billion at 31 March.
"We must continue to de-lever the balance sheet and de-risk the business," stresses Anderson. "We will remain disciplined with costs and capital commitments."
Days of airline CEOs being "smitten by market share", are over says Swelbar. United Continental chief executive Jeff Smisek admits, while the merged network and financial flexibility allows for a strong foundation to build sustained profitability, "In this volatile environmentevery new route requires an even stronger business case."
One of the most prominent indicators of a new kind of airline business discipline being practiced by US carriers is sustained capacity constraint. US carriers turned round a net loss of just under $3 billion in 2009 to a net profit in excess of $3 billion last year.
But according to US Transportation Department statistics, combined available seat miles for US domestic and international travel grew only 1.6% year-over-year from 2009 to 2010, compared with a pre-downturn growth of 3.7% from 2006 to 2007.
Touting US network airline capacity restraint, US Airways recently estimated those carriers shrunk domestic capacity from 2006 to 2010 by 13%.
During that time US Airways concludes its fellow network carriers along with Alaska, JetBlue and Southwest have collectively seen their pre-tax margins drop from 1.9% to a negative 3.6% before climbing back to 3.8% in 2010.
US airlines now more than ever have a robust arsenal of tools providing opportunities to bolster their historically weak margins, including joint ventures, capacity discipline, product unbundling and an utilisation of employees, aircraft and airport gates that are increasingly more effective than a decade ago.
But can an industry that considers 5.3% pre-tax margins wildly successful ever hope to achieve margins similar to other industries? Swelbar highlights numerous exogenous factors that can seemingly happen overnight - economic disruptions, outbreaks of SARS and H1N1 or geopolitical issues - that make it difficult "in this industry to sustain margins that normal business earn". Yet as carriers continue their efforts to diversify through global route structures and create new outlets for ancillary revenue, "opportunities to increase margins are better than they've ever been".
Europe in some ways is a microcosm of the polarisation of global fortunes. Europe's economic recovery has been sluggish at best, bordering on precariously fragile. But there is a marked difference in the fortunes of the Greek and the German economies for example, even if Eurozone difficulties threaten to yet engulf the Continent's stronger economies.
Likewise the fortunes between different types of carrier is also marked. The major network carriers, bolstered in muscle by recent consolidation, returned to profitability last year - led by the strong recovery in premium long-haul traffic. This continued into 2011 with the big network carriers still reporting encouraging long-haul premium traffic.
On the short-haul, low-cost carriers continue to spread their wings. There are signs of not just a more cautious approach to capacity, but more selective. The hit on short-haul price-sensitive travel from low consumer confidence and the impact of widespread austerity measures, has seen them turn further afield - both in geography and market.
But while neither network majors nor their low-cost counterparts will be immune to the impact of volatile fuel prices and a growing tax burden, it is small and mid-sized carriers left in the middle ground with perhaps the most to fear as these add to existing woes.
"They are getting squeezed from all angles," says John Strickland, head of London-based JLS Consulting. "They have not got the size and muscle of the big network carriers, and they don't have the global reach." Competition from low-cost carriers is intense, as the European budget giants spread deeper into backyards relatively untouched until now.
There is further pressure for those carriers heavily dependent on tourism by the impact of austerity measures and low consumer confidence on leisure travel. "Overall the pressure point is on short-haul, price sensitive travel, especially in the summer season. The evidence is that the airlines are struggling outside of the summer peak months of July and August," says Strickland.
While the big network carriers sustain short-haul routes to feed their long-haul network, smaller operators have retrenched their long-haul networks, or abandoned them altogether, says aviation consultant and former Olympic Airways chief executive Rigas Doganis. "Since they [small network carriers] have become almost totally dependent on short-haul routes, the challenge is how can they achieve a sustainable competitive advantage in face of growing low-cost competition?
"I think the challenge is less on the cost side, and more on the marketing and revenue side. These carriers tend to have lower labour costs, but are poor on the marketing and distribution side and have difficulty selling themselves to incoming markets," he says. "And their attempts to restructure have been further hindered by government interference, which manifests itself in the rapid changes in chairmen and chief executives."
Such issues have already driven consolidation moves, with a number of carriers operating as part of larger airline groups. Others are left either to make themselves attractive to potential partners or to create a niche for their own operations. But to achieve this, many still have to complete further restructuring.
"I think they will struggle on," adds Doganis, pointing to them still having a number of important short-haul routes with no low-cost carrier competition, allowing them to maintain higher fares, but adds: "The death knell will sound when you find low-cost cost carriers entering their main markets."
It has not taken long for growth in the Asia-Pacific to return rapid levels. Airlines in the region were able to ride this recovery and it was, by any measure, the most profitable region in 2010. While the region's premier network carriers and fast-growing Chinese operators stood out last year, it is the development low-cost carriers and network carrier responses, driving much current activity
If imitation is the best form of flattery, Tony Fernandes and his crew at AirAsia will be happy that so many clones have sprung up around Southeast Asia over the last year. Kuala Lumpur-based AirAsia also has associates in Indonesia and Thailand, with new ones planned in the Philippines and Vietnam. It plans to place more of the Airbus A320s ordered in those countries rather than in Malaysia in coming years.
And then there is AirAsia X, the long-haul low-cost affiliate that flies from Kuala Lumpur to several points in Australia, China and India, and Europe. A slew of new services to more points in Asia are coming up after the Malaysian government gave it the green light in June to apply for more rights.
If it can't beat them, take the fight to them. That is what flag carrier Malaysia Airlines appears to be finally doing in response to AirAsia, which has taken away a chunk of its rival's domestic and regional market share.
MAS subsidiary Firefly, which operates turboprops out of Kuala Lumpur's secondary Subang Airport, is acquiring Boeing 737-800s and starting low-fare services from Kuala Lumpur International Airport. This will pit Firefly directly against AirAsia in the low-fare short-haul market, while MAS plans to use its new 737-800s, Airbus A330s and A380s to offer a better premium and long-haul product in competition to AirAsia X.
Singapore, with its liberal aviation policies, has also become a major hub for the regional low-cost market. It has two budget carriers: Tiger Airways, in which Singapore Airlines has a one-third stake, and Qantas associate Jetstar Asia.
Tiger has expanded its A320 fleet and network from Singapore and, in the last year, unveiled plans for joint ventures in Indonesia, Thailand and the Philippines. Jetstar Asia, apart from bolstering its short-haul fleet, has begun A330-operated flights from Singapores to Auckland and Melbourne. More destinations to Asia and Europe are set to follow.
Together with the growing market share of AirAsia X that has provoked a response from Singapore Airlines, which has been averse to entering the low-fare market. SIA now uses SilkAir to supplement its full service product on regional networks. It has opted against taking on the short-haul low-cost carriers directly, leaving that market to Tiger. But it is planning to start a Singapore-based long-haul low-cost subsidiary.
That comes on the back of a realisation that AirAsia X and Jetstar Asia could become serious players in the long-haul business, and that it could lose market share if it fails to get into a market segment that is still in its nascent stage. Long-haul low-cost also provides an alternative revenue stream from a potentially high-growth market, supplementing its still lucrative premium business.
Thai Airways, like Malaysia Airlines, has suffered from Thai AirAsia's entry into the domestic and regional market. In response, it plans a regional subsidiary - Thai Wings - modelled on SIA's SilkAir, and a Bangkok-based low-cost subsidiary with Tiger to take on AirAsia.
In Indonesia, budget carrier Lion Air has built up a significant domestic network using a fleet of Boeing 737s. Indonesia AirAsia, meanwhile, has a stronger regional network, but it plans to add more domestic flights. Tiger also aims to increase its presence, planning to take a stake in troubled Indonesian carrier Mandala to operate on both domestic and international routes.
Garuda Indonesia, however, is not standing still. It has restructured and, under chief executive Emirsyah Satar, is in the mood to take on budget carriers that have taken away much of its domestic and regional market shares. Its low-cost unit Citilink will add more aircraft in an effort to take on both Lion and AirAsia.
Only in the Philippines are budget carriers having a virtual free rein, given the numerous problems facing full service flag carrier Philippine Airlines. Cebu Pacific has become the dominant local low-cost player, but it is likely to face growing competition. Tiger has taken a stake in local carrier Seair and is pushing for a growth of its domestic and international network, while AirAsia will start services in the country shortly.
Full service carriers are also suffering in India, where the domestic market is now dominated by the low-frills airlines. Kingfisher and Jet Airways have given up much of their domestic network to low-cost subsidiaries Kingfisher Red and Jet Airways Konnect, believing that this would be a better strategy against the dedicated low-cost airlines in the country. The going, however, remains tough.
The likes of IndiGo, SpiceJet and GoAir, have been winning a significant amount of market share. That is likely to continue for several years, although overcapacity remains a concern, with all three ordering aircraft for delivery in the coming years.
Northeast Asia remains the "white spot" for low-cost travel, but there is finally some traction even there. All Nippon Airways, in a joint venture with two Hong Kong-based investment firms, is developing Peach Aviation. This will operate out of Osaka's Kansai Airport in 2012, and connect both domestic and regional destinations to Japan.
Industry sources say Japan Airlines is also mulling a low-cost subsidiary of its own, possibly in collaboration with Oneworld partner Qantas' subsidiary Jetstar.
On the back of buoyant traffic, Latin America's biggest airlines are growing bigger. And, as LAN and TAM move closer to their blockbuster merger, the pace of consolidation picks up, posing questions about how the major airlines route maps will evolve.
Airlines elsewhere faced an array of headaches in the first quarter of 2011, from tsunamis and financial crises to political unrest. Global air traffic stumbled, but Latin America, reported a robust rate of 15%. Brazilian traffic grew 17%, passenger numbers in Peru gained 22%, and were up a third in Chile.
Ash from Chile's volcano disrupted June traffic, but the major airlines have confirmed their confidence in the long-term, with high profile aircraft orders. Five of the six largest carriers (LAN, TAM, Gol, AviancaTaca, and Copa) have ordered up to 167 narrowbodies, and reports are that LAN is also close to a big order for Boeing 787s.
Aeromexico is the only major carrier keeping quiet about its fleet plans, but insiders say it also is looking to add up to 20 new aircraft. Even without it, the other five airlines are betting $18 billion on Latin America's continued growth. While smaller operators will continue to serve their own countries, Aerolineas Argentinas being one of the largest, it is now clear that the region's cross-border markets are dominated by only six carriers.
This may soon only be five, if a crucial imminent regulatory decision from Chile's competition court clears the path for the LAN-TAM merger. Approval may come with conditions; indeed, LAN and TAM proposed some. But LAN chief executive Enrique Cueto, is hopeful. "The mitigation measures solve all the problems," he argues.
The deal still requires approval in Brazil, where its reception may be more favourable. Brazil's government has done everything it can, including a promise to relax its foreign ownership cap, in order to expedite the merger. If all goes per plan, LAN and TAM will formally integrate in the first quarter of next year. Latin American will then have two major airline groups LATAM, as LAN and TAM will call themselves, and AviancaTaca.
LATAM will be more than triple the size of AviancaTaca, but the two groups have comparable networks. Both serve most major Latin cities, although through different hubs. Reflecting their different backgrounds, LATAM is stronger in South America's southern cone, where AviancaTaca has no presence in Uruguay or Paraguay. Conversely, LATAM is absent from all of Central America, where AviancaTaca is particularly strong.
After Aires re-emerges as LAN Colombia, LATAM could make a push into Central America through its new Bogota hub. Conversely, AviancaTaca is likely to boost its southern cone network by adding north-south non-stops from Bogota instead of routing everything through its current hub in Lima.
Beyond the region, LATAM has more European routes, while AviancaTaca has stronger ties to the USA and Canada. As they grow, each group will strive to correct its own network shortcomings.
Latin America's other three major airlines seem likely to continue their current strategies. Copa continues to expand its sixth freedom network over Panama. AviancaTaca could pose some challenge to it by adding flights south from its hubs in San Salvador and Bogota, but Copa is well-entrenched and has more room to grow at Panama's airport.
GOL has retreated from its long-haul, low-cost routes and is trying to sell its remaining Boeing 767s. It faces more domestic competition as AviancaTaca beefs up the former OceanAir, now called AviancaBrazil. But Gol is well placed to retain its domestic and short-haul international strength, and in July acted to strengthen its presence in this sector by agreeing a deal to acquire fellow Brazilian low-cost operator WebJet.
Elsewhere, Aeromexico has already refilled as much of the international vacuum left by Mexicana as any Mexican carrier could do. When Mexicana stopped flying, Aeromexico lacked the fleet to respond quickly enough to keep all of Mexicana's international traffic, so some of it was lost to foreign carriers. Aeromexico faces a slow, tough battle to win it back. Now, it has survived Mexico's war of attrition, raising $330 million in a recent IPO, Aeromexico is poised to grow.
As Latin America's biggest airlines grow, consolidation also occurs at the other end of the spectrum, as older, shrinking carriers fade away. Ecuador's Icaro is the latest. Two other casualties of consolidation Aviacsa and Mexicana still struggle to make a comeback.
Emirates led a solid recovery among major Middle East carriers last year, bouncing back with record profits from a difficult period in 2009 when the global crisis briefly looked like it might bring the carrier's home port of Dubai crashing back down to earth.
Revenue for the top 10 Middle East carriers rose a fifth in 2010 to $34.9 billion, over 40% of which was contributed by Emirates. However, IATA expects the region's airlines' profits to slip as the political unrest in parts of the region affects passenger demand.
By the time Emirates announced its 2010 results in May it was "business as usual", despite the near-term threat caused by the political unrest in some markets close to home. In its last fiscal year the passenger numbers rose by 14.5% to over 31 million while revenues reached $14.8 billion and net profit soared by over 50% to $1.5 billion.
The last year saw Emirates emphasise its confidence in a sustained recovery, signing eye-watering deals for 32 more Airbus A380s and 30 Boeing 777-300ERs, and taking its total for the types to 90 and 71, respectively.
The airline's president Tim Clark played down the A380 deal to Flightglobal, saying the mega-order was "simply an extension of the growth strategy, which we have been doing successfully for quite a number of years".
Over at local rival Qatar Airways, chief executive Akbar Al Baker conceded to Airline Business earlier this year that the unrest in the Middle East had dampened the tail-end performance in fiscal 2010-2011, after record profits in 2009-2010.
He said that profits were down because the performance during last three months was affected "by the regional issues and the rising oil price".
With the Qatar fleet and route network breaking into three figures this year, Al Baker warned that the airline's high-powered expansion was set to continue in the near-term. "We will continue the aggressive growth until 2013 - that's over 25% and the addition of 10-12 destinations annually, he said.
Next on Al Baker's agenda is to grow the cargo business and develop its Doha hub as a major freight centre, following the June 2011 deal to acquire 35% in European long-haul logistics carrier Cargolux. "It is a strong move for both airlines," says Al Baker. "There will be so many synergies that benefit us both and it will make Cargolux's Luxembourg base a stronger [cargo] hub."
Abu Dhabi-based Etihad, the third member of the Gulf triumvirate, achieved an important step towards sustained profitability last year when it reported it would break even at the EBITDAR level.
"Our next goal is full break-even in 2011, leading to sustainable profitability from 2012 onwards," says chief executive James Hogan. However, he warns the volatile fuel prices "will be a major challenge".
For Bahrain's Gulf Air this year has been extremely difficult, with the uprising on its doorstep hampering traffic through its hub. However, the airline has stuck with network development plans as chief executive Samer Majali works to re-invent the airline and achieve sustainable profitability.
African carriers have always faced strong competition from the north, but more recent forays by airlines from the east present even greater challenges.
The African sky is today dominated by European and Middle Eastern carriers, with those from China playing an increasingly robust role on the continent. Under-capitalised and poorly resourced, African airlines are in a little position to mount an effective response to the growing competition. Their place in the shadows, however, cannot entirely be placed at the door of their powerful predators. Airlines and their government owners have themselves to take responsibility for their own shortcomings.
For decades, Africa's airlines, most of which continue to labour under state control, have suffered from a lack of capital, government interference and frequent changes of leadership. This is exacerbated by uncontrolled market access given to foreign carriers, by governments under pressure from development partners and donor countries, and seduced by the promise of increased traffic.
This has left unprepared local carriers at a massive competitive disadvantage and has led to the collapse of some national carriers, with consequent free rein to foreign incomers. "The loss of an airline has a knock-on effect," says the African Airlines Association (AFRAA), and leads to "long term damage to growth prospects of an African country under the current economic reality".
What also rankles with AFRAA is the EU Blacklist of airlines banned from operating in European airspace for a lack of safety oversight. This includes more than 125 airlines from 18 African countries, accounting for some 40% of the total number on the list, and one-third of the continent's 54 sovereign nations. Several more airlines are only allowed restricted operations in Europe under specific conditions. AFRAA argues that the vast majority of the banned airlines would never operate into Europe, and the list only serves to perpetuate the perceived view that all airlines in Africa are unsafe.
The full implementation of the Yamoussoukro Decision, aimed at liberalising African skies, would also "beef up and prepare Africa's airlines for external competition", says AFRAA secretary general Elijah Chingosho. But this highlights the perennial problem of Africa. The Yamoussoukro Decision, signed by Heads of States in 1999, replaced an original 1988 declaration.
Nearly a quarter of a century later, progress remains minimal. The Celestair alliance of three airlines - Air Burkina, Air Uganda and Air Mali - and ASKY, both private sector-driven, offer small encouragement, but the real success has been the Kenya Airways/KLM strategic alliance.
One organisation that can move Yamoussoukro further forward is the African Union, but it has so far failed to provide adequate leadership and resources in the drive for a liberalised air transport industry.
With very few exceptions, Africa's airlines, therefore, remain relegated to niche operations, which are barely sustainable and, without generating sizeable profits, are unable to grow into a competitive force, either individually or collectively.
Africa, the world's second-largest and second most populated continent, accounts for less than 3% of the world's air traffic, a figure little changed over the past decades. A large majority of this traffic is being carried by foreign airlines. Not a single African airline figures in the world's top 50 airlines by traffic.
Source: Airline Business