Kevin O'Toole/LONDON
IT HAS TAKEN a long time to arrive, but recovery in the world airline industry appears to be in full swing. The next question is: how long will the good news last?
The figures for 1995 are certainly encouraging. On the evidence so far, the year was the most profitable on record, a view supported by the Flight International ranking of the world's top 50 scheduled-airline groups.
A tally of the results shows that the world's leading carriers collectively earned more than $4 billion in net profits. A year earlier, the same carriers had achieved little over one-eighth of that as they edged out of recession.
Profits are not yet universal, but there are now fewer groups making losses and, where losses occur, the red ink is flowing less freely.
Perhaps more encouraging is that fewer than half a dozen are losing money on their operations, before taking into account the impact of financing costs or hefty restructuring charges.
These readings come with some caveats - not least, the usual warnings about wide variations in accounting standards around the world. It should also be noted that these are group results, not simply for airline operations, although arguably that gives a clearer view of the underlining health of the industry. A disastrous venture into hotels or successful expansion into catering can affect a group's financial fitness as surely as any change in airline yields.
The groups clearly account for the bulk of the world's scheduled air services - essentially covering carriers which have annual sales of more than $1 billion.
The figures are also lent support by preliminary results published by the International Civil Aviation Organisation (ICAO). It estimates that the world's scheduled airlines posted an operating profit of $14 billion in 1995, the highest on record.
ICAO has yet to release its estimate for the net result, but it expects the figure to be positive for the first time since recession began five years before, having only narrowly missed break-even in 1994.
In part, the revival can be traced to a general recovery in the world economy, which kept passenger traffic growing at over 6%. At the same time, the airlines kept the reins on capacity, allowing load factors to creep back up to 67%, only a point behind their height during the boom of the late 1980s.
Yields also held up, while costs fell. In short, the airline industry recovered some of the balance which it lost during the years of recession, over-capacity and dwindling fares.
In terms of demand, there seems no reason why the improvement should not continue. ICAO believes that passenger traffic will grow by 6-7%, at least for the next three years. Other forecasters tend to agree, provided that the world economy does not hit any unexpected bumps in the meantime.
More difficult to predict is whether the airlines will, this time round, forego the temptation to expand too quickly in the boom, only to be caught out by the bust.
As the International Air Transport Association (IATA) pointed out early this year when presenting its own 1995 results, the airlines are still far from achieving what most industries would consider a reasonable return (Flight International, 3-9 July).
To illustrate the point, the net profit of $4 billion translates into an industry-wide net margin of less than 2%. Hardly a sign of financial health, especially given that this is one of the good years. The last time that the industry managed to sustain anything substantially better was in the mid-1960s, in the days when airlines were a good deal smaller and even more heavily regulated. The optimistic view is that the industry may be about to break the cycles of the past 30 years, having been given an abrupt wake-up call by the severity of the last boom-to-bust.
There is some evidence to suggest that airlines are being more circumspect. Aircraft ordering is recovering, but not yet booming, and the major airlines are still preaching the virtues of good housekeeping, rather than fighting for market share.
Forecasters are watching with interest to see if the resolve holds. While there is little doubt that the industry will again produce a sizeable profit this year, the question is whether it will go on to reach new heights or show signs of simply reaching another plateau. That is still too close to call, says IATA.
NORTH AMERICA
Optimists should be cheered by the progress being made in the US market. Only a few years ago, the major US carriers were leading the gloom with three of their number in Chapter 11 bankruptcy protection and another couple perilously close to joining them. Now they are leading the industry back into profit.
A graphic illustration of the turnaround comes from Continental Airlines, once one of the bankrupt airlines, but one which managed to emerge among the world's biggest profit-makers in 1995.
With the notable exception of Trans World Airways (TWA) , all the US majors managed to produce handsome profits over the year. If the net returns were not higher, that was largely because of the impact of restructuring charges and employee share-ownership programmes, which cost the industry around $2 billion.
Evidence of the underlying potential can be seen in the level of operating profits being made. These are shown in the top 50 ranking before the impact of restructuring. On that basis, four of the airlines passed the $1 billion mark.
Those operating gains are expected to show through more strongly on the bottom line this year. Most of the restructuring has now be paid for, but the cost-savings are still feeding through. In 1995, unit costs were almost unchanged, while passenger yields continued to recover.
The record performances have continued this year with a spectacular clutch of profit announcements over the first two quarters, which took even the most bullish of financial analysts by surprise. Even TWA has ended the first six months of the year more or less level.
The main cloud on the horizon is the re-imposition of the US passenger-ticket tax. The absence of the tax is credited for putting some added spice into the results so far this year. Not only has it more than offset the penalties of the fuel tax, imposed amid dire warnings from the airlines towards the end of 1995, but has also left enough over to underwrite fare cuts and help stimulate traffic.
The tax's re-imposition now threatens to dampen prospects in the second half of the year and to expose the true burden of the extra levy imposed on fuel.
Nevertheless, the US airlines are fundamentally in good shape. Costs are under control and the industry appears to have regained the structure it appeared to have lost during the dark days of recession and fare wars. The majors have also regained their poise in responding to the low-cost start-up airlines.
The focus is still on the virtuous task of trimming costs and paying down debt, rather than any signs of a return to cut-throat pricing.
EUROPE
By contrast, Europe's carriers are only at the start of what promises to be a period of massive upheaval. Not only has the industry yet to come to terms with the full implications of internal European liberalisation, and possibly transatlantic open skies, but also with the lingering questions over its over-burdened infrastructure.
Nevertheless, the profits of the main flag carriers were almost universally improved over 1995, swept along by the rising tide of healthy passenger -traffic growth and record load factors. Yet a visible gap still remains between the profitable, largely privatised, airlines of the north and the inveterate state-owned loss-makers of the south.
Those airlines which have already tackled cost issues are in pole position. British Airways is a case in point. Having gained around $1.5 billion over the past five years through a mixture of cost cuts and efficiency gains, the airline finally reclaimed its place in 1995 as the world's most profitable airline group. Others, such as Finnair, KLM, Lufthansa and Scandinavian Airlines System, also joined in with solid profits performances.
Further south, the losses persist, although there are some signs that the state-owned carriers are beginning to improve their operating performance because of the effects of state aid and the austerity measures which the European Commission (EC) has insisted should accompany hand-outs.
Air France, for example, showed its first operating profit since 1989, but that turned to heavy losses after it incurred close to $400 million in charges to cover labour re-organisation. Iberia, too, was forced to put aside almost as much to cover redundancies.
Olympic Airways, which narrowly failed to make it into the top 50, even managed to show a net profit, but spoiled the result by sacking the chairman who had helped produce the result and running foul of the EC over the conditions of its state-aid approval.
The already belated restructuring efforts of these European carriers have been further slowed by industrial unrest, including a string of strikes which have taken place in Belgium, France and Italy.
Alitalia was brought close to the brink by union opposition to its planned restructuring, losing yet another senior management team in the process. Eventually, in June, a union deal was agreed which paved the way for a capital injection of around $2 billion to arrive over the next 12 months. Alitalia's underlying results make grim reading, alleviated only by the group's gain from the sale of its stake in Aerporti di Roma.
Time is clearly running short for restructuring. The completion of the single European air market is less than a year away, promising to bring in its wake the sort of structural change seen in the US market over the past decade. Low-cost start-ups are already taking wing in Brussels and London, while the region's flag carriers are beginning to stray on to foreign territory as they attempt to build up their networks of hubs.
Until now, progress has been relatively slow and the more sluggish carriers have been helped by a generous amount of traffic growth in the region, but there are worrying signs that the upturn may be fading.
Slow economic growth throughout most of the continent is compounded by the strength of the main European currencies. The US dollar, for example, sank by another 10% against the German deutschemark in 1995, a fall which wiped more than $300 million from Lufthansa's revenues.
Yields were already under pressure, but the impact of a strong currency has emphasised their fall. The Association of European Airlines reports that passenger yields dipped by 2.1% over 1995, in effect translating into a 5% dip in fares after adjusting for inflation. On the transatlantic market, that fell even further to a real drop of more than 7% as the impact of the weakening dollar took effect.
Lufthansa has admitted that it will struggle this year to maintain the kind of profits it produced in 1995 and, at the half-year stage, its worries seem to be justified. Others, such as Finnair, which are dependent on the German economy, have already warned that 1995's record profits will not last.
Most of the carriers are responding with renewed drives to cut costs, including British Airways, Lufthansa and Swissair, which sank to a loss after making a provision for its cuts. This resolve speaks well for the industry's long-term stability, but it would be ill-advised to hold out too much hope for major profit improvements in Europe for 1996.
ASIA PACIFIC
Although traffic continues to run ahead in the Asia-Pacific region, here too there is sign of pressure of yields and universal complaints about intense competition.
The heavyweight Japanese carriers continued their steady recovery, although it has come a little more slowly than forecast, in part because of a faltering economic recovery and the strength of the yen. Japan Airlines (JAL) and All Nippon Airways both returned to profit in 1995, and the performance should continue as they work methodically through their latest three-year plans.
The most pressing issue now facing Japan is renegotiation of the US-Japanese passenger bilateral. The talks are destined to be rocky, as already hinted by the row over cargo rights. JAL, for one, is intent on winning a reprieve from growing US competition at Kansai and Tokyo, while the USA is pressing hard for open skies. Whatever the outcome, the deal will have a lasting impact on the transpacific market.
Elsewhere in the region, Cathay Pacific and Singapore Airlines again emerged among the world's top star performers, but their profits have come on the back of persistent action on costs. Others such as Malaysia Airlines and Thai Airways are also being forced to grapple with restructuring.
There is also a new breed of competition beginning to emerge within the region as countries begin to loosen up the regulations to allow competition from second carriers.
South Korea's Asiana and Taiwan's EVA have both propelled themselves into the top 50 ranking with some impressive growth figures. Asiana grew by nearly one-third in 1995 and promises to keep the expansion rolling with a massive tally of new aircraft orders.
EVA, which pushed up sales by another 45% in 1995, also recorded its first profit since starting operations in 1991. EVA has begun to force the pace in the domestic market with a spree of tie-ups and acquisitions of local carriers. China Airways has been prompted to follow suit.
Despite the occasional hiccup, the region's success continues to be underwritten by the world's fastest rates of traffic growth. ICAO estimates that scheduled passenger traffic increased by 11.6% last year, although the Organisation's forecast for 1996 is a dip in growth, back to 9.5%.
The traffic rates will need to be at least this good, to mop up the volumes of new aircraft capacity which arriving in the region. In 1995, seat capacity appears to have kept more or less in line with passenger growth, but there was little margin for error.
Like much of the rest of the world, the direction in which the Asia-Pacific performance turns in 1996 could be a sign of how far the world airline industry has gone towards taming the excesses of its business cycle.
Source: Flight International
