In the final analysis, the airline industry's financial results for 1998 were once again a mix of the encouraging and the depressingly familiar. Overall profitability came out at almost identical levels to the year before. The industry should perhaps take heart from that fact, given the dire predictions with which the year had started as crisis spilled out of Asia.
But while they may have emerged from last year's economic jitters relatively unscathed, the evidence is that industry profits have once more hit their familiar plateau. In short, this is as good as it is going to get, at least until the next upturn.
As results from the latest Top 100 rankings demonstrate, industry operating margins failed to break beyond the ceiling of 7% set the year before, leaving net margins still hovering around an unimpressive 3% mark.
It is true that the 1998 performance is among the best on record, comfortably ahead of the height of the last boom. But it still leaves the industry short of the double-digit operating margins that had seemed within reach as the industry burst out of recession two years ago. Back then, hopes were pinned, albeit cautiously, on the chance that this could be the upswing that finally saw the airline business achieve a new level of profitability. It appears that the world will have to wait a while longer
New rankings
It is worth noting that the rankings this year have been split into two parts: the first concentrates on group financial performance and the second on the operations of individual passenger airlines. This has allowed more detail to be given on each airline group than could be achieved in a single table. That includes some key performance indicators such as operating margins.
All financials come with the usual warnings about the lack of comparability between different airline accounting standards around the world. But operating margins arguably provide the most uniform guide to underlying performance - free from currency fluctuations and the exceptional gains or charges which can distort net results.
Both financial and passenger rankings, are based around the top 100 operations, but with summary details given for another 50, and are compiled by Air Transport Intelligence (ATI), the sister on-line database and news service to Airline Business. On a rough calculation, the top 150 airline groups account for over 80% of world revenues, making the ranking strongly representative of the industry as a whole.
Tough outlook
If profits reached a plateau in 1998, then evidence from the latest round of mid-year financial reports, suggests that they will struggle to stay there again this year. The US and European majors, which have provided a powerhouse over the past couple of years are already struggling with a mix of overcapacity and falling yields.
There is also an industry-wide impact to come from rising fuel costs. Historic lows in the oil price have given a significant fillip to airline profits over the past couple of years. That reversed dramatically in the first quarter of this year as prices once more spiked, leaping over 20% in a month.
The full force of the rise will take time to filter through into airline costs thanks to hedging by many of the major carriers, but it is expected to act as a damper on profits over the next year or more.
The Association of European Airlines (AEA) reckons that 30% lower fuel prices in 1998 translated into a bottom line gain of close to $1 billion for its members. That represents half of the net profits that the AEA airlines posted for the year. In 1999 they may have to live without much of that windfall.
Latest forecasts, however, suggest that despite the near-term pressure on industry profits, the USA and Europe should begin to see a gradual recovery going into 2000 and picking up in 2001. That depends, as ever, on no sudden movements in a world economy which is only now regaining its poise after last year's tremors and upon capacity restraint.
North American lead
Prospects will continue to depend heavily on the state of the US economy. Strong domestic demand again helped the US majors to produce a crop of double digit operating margins in 1998. Even with the losses at TWA and strike-hit Northwest, together with a weak performance north of the border from the two Canadian majors, the North American region still emerges from the rankings with the highest overall operating margin at a healthy 8.5% (see regional summaries page 70). Expectations are for the region to see margins dip a little this year, but not dramatically.
European airlines too showed a robust performance in the 1998 rankings. Operating margins eased up to 7.5% and net profits climbed above $3.4 billion. In part that came from the rise of the re-emergence of reformed state-owned carriers such as Alitalia, Air France and Iberia, all of which climbed up the profits rankings. A rehabilitated Alitalia even joined Lufthansa and British Airways with double digit operating margins.
The likelihood of Europe repeating this performance in 1999 seems remote, given the gloom so far this year as yields melt and capacity continues to stream onto the North Atlantic.
Outlook in the Asia-Pacific region too looks uncertain. As the rankings show, there were a few glimmers of recovery last year, but they remained patchy. Virtually no group in the region managed to improve its operating margins, with the exception of Qantas and Ansett in a robust Australian market. The likes of Philippine Airlines, Garuda and Air India still remained on the critical list.
The league of worst net losses was also again dominated by groups from Asia-Pacific, including Cathay Pacific making its debut on the list after years of glittering profits. It was joined there by China Southern and China Eastern as the mainland Chinese market began its decent. However, the 1998 tally of losses was not on the scale of the year before when massive restructuring provisions left Japan Airlines, Asiana and Korean Air alone showing over $1.2 billion in red ink.
Benefits of scale?
A final trend worth watching is the growing dominance that continues to emerge at the top of the industry. An analysis by segment shows that the largest 25 groups account for close to 70% of revenues within the Top 150 ranking. The bottom 50 control less than 5% - their combined revenues are less than that of a group like AMR, BA or Lufthansa.
More significantly, the Top 25 segment also outstrips the rest of the industry in terms of profit margins. Interestingly the next most profitable segment comes down at the bottom of the leagues, helped by some more strong performances among the regional operators. Comair and Atlantic Southeast both top the profitability league.
The squeeze appears to be taking place in the middle orders. Admittedly the geographical mix plays some part. And some strong individual performances continue to stand out, including independents such as Emirates or Virgin.
But it is hard not to draw the conclusion that pressures of globalisation and consolidation are taking their toll in the middle ground - alliances notwithstanding. In short that the most profitable place to be is either alongside the top tier or down the rankings among the entrepreneurs. As profits get harder to make over the next year it will be interesting to see if such conventional wisdom proves correct.
| Top 100 airline groups - five year record | |||||
|
| 1998* | 1997* | 1996 | 1995 | 1994 |
| Revenues | 295.2 | 293.2 | 281.4 | 272.9 | 244.9 |
| Operating result ($bn) | 19.8 | 20.3 | 14.0 | 15.5 | 10.9 |
| Operating margins | 6.7% | 6.9% | 5.0% | 5.7% | 4.5% |
| Net result ($bn) | 8.9 | 9.1 | 5.4 | 1.7 | -0.2 |
| Net margin | 3.0% | 3.1% | 1.5% | 2.1% | -0.1% |
NOTE: Variations take place in the composition of the Top 100 ranking each year, which may mean that not all years are on an identical basis. *Margins for 1997 and 1998 have been rebased to take account of groups which did not disclose profit figures. Other results are bare totals.
Source: Airline Business
