Airlines may have ended 2006 on a relative high after nearly breaking even collectively for the first time in six years, but this year will see a return to more challenging times as a slowing economy is likely to stifle recent booming revenue growth.
Strong growth in passenger numbers, revenues and even yields has provided a tonic for an industry that has suffered a succession of blows since the terror attacks of September 2001.
Passenger growth has enabled airlines to outperform initial expectations for 2006 and cut their global losses, according to figures from IATA, from just over $3 billion to about $500 million.
Even the hard-hit US airline industry had some reason for cheer as it recorded a profit before restructuring costs. But although the industry is this year expected to make its first profit since 2000 - at about $2.5 billion - this masks probable stalling in underlying profit growth because the improvement reflects likely lower restructuring costs from the US industry in 2007.
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High fuel costs will continue to eat at airline profits |
The same IATA forecast estimates that industry revenue growth will fall from 8% in 2006 to nearer 4% this year. This lower figure reflects a slowing in the economic cycle, particularly in the US economy. While aviation economists remain confident it will be a soft landing, given a more robust performance in Europe and Asia, revenue and passenger growth will be under pressure in 2007.
Airlines are also unlikely to get much respite from the recent high fuel costs. Although oil prices have fallen sharply since the highs of early August, experts still see limited spare capacity in oil supply and refining. Consequently, in its recently revised forecast, IATA scaled back its estimate for oil prices by only $2 to $61 a barrel of Brent crude - just $5 a barrel lower than last year.
Given that a number of beneficial hedging deals will end this year as well, IATA believes the industry's fuel bill will actually rise again in 2007 - to $120 billion.
Airlines could be forgiven for thinking the good times are ending before they really begin. IATA chief economist Brian Pearce notes: "We have been through a period of boom. Under normal circumstances, airlines would have been very profitable during this time. The point of concern is the rise in fuel prices has eaten away that profit boom."
Consolidation frenzy
The airline consolidation moves that broke out in the US industry at the end of last year - US Airways' move for Delta setting off a frenzy of approaches and speculation - are likely to play out during the course of this year. But an agreement on open skies in the key Europe-US market appears as far away as ever following last November's US mid-term election results and the subsequent dropping of proposed foreign control concessions.
In Europe, Alitalia and Olympic Airlines face crunch years again, while other carriers will try to hang on to the modest gains secured in the last couple of years. Much of their attention will be turned to the issue of the environment and the legislative bargaining that now follows Europe's emissions trading scheme proposals (see environment forecast).
European carriers could also find themselves caught in the middle of a transatlantic stand-off over the supply of passenger name record (PNR) data to the US border authorities. The supposedly painless part of EU-US negotiations on the latter's use of this data - simply adjusting the existing deal to a different legal basis - went to the wire and beyond last September. Now they have to go through the whole process and more when the deal expires in July.
Long-term optimism and growth forecasts continue to be driven predominantly by Asia-Pacific - in particularly the vast new markets of China and India - and the Middle East. These are regions where carriers have dominated the strong aircraft order output of the past two years, leading passenger growth in 2006, and are likely to do so again this year.
Source: Flight International
