Chris Jasper/LONDON
On first sight, recently published financial figures for the USA's major airlines appear to point to a successful year in 1999. Most of the top 10 reported healthy net profits and exhibited increases in passengers boarded and group turnover. All this indicates that the air transport market they serve is expanding.
Other indicators, however, are not so healthy. Operating margins, for example, were generally squeezed last year, while the US majors, as a group, have failed to reverse the seemingly inexorable downward spiral in yields.
The disparity between these two apparently opposing trends suggests that, although the airlines have been able to secure net gains, they have not done so through their operational performance, but through other means, most importantly through wide-ranging asset disposal. This is hardly a sustainable situation.
The average net profit for the top 10 was $473 million last year, a 7.75% improvement on the previous year. At the same time, however, operating margin - a measure of operating profit against turnover - fell to an average of 6.5%, from 8.3% in 1998, despite a 4.1% increase in average turnover.
The airlines' operational profitability, therefore, is growing more slowly than are sales, and carriers are turning to sell-offs to boost their bottom-line figures.
Extraordinary gains last year came from the disposal of assets, including shares held in SITA's Equant subsidiary and the Amadeus and Galileo computer reservations systems.
These windfall gains helped the US majors through an otherwise tough year, and are similarly boosting the profitability of other airlines worldwide. Underlying trends, however, do not look good.
The market for intra- and extra-US air travel is expanding, with more than 550 million passengers carried by the top 10 last year, more than 3% up on 1998. The increase reflects not only a general recovery from the Asian slump, but also the continued buoyancy of the US economy. Traffic, too, is up - by nearly 5% last year on 1998 - and load factors are also edging upwards, the average for the US majors being 70.92% last year, an improvement of 0.74 points.
Looming over these positive indicators, however, is the continuing slump in yields, down last year by a further 1%. Although slow, this decline is gradually eroding the profits of airlines everywhere, and reflects the entrenchment of a market environment in which the price of travel is becoming ever cheaper.
Airlines would like to raise prices to combat the yield fall-off. In the wake of the Asian crisis, however, the transfer of excess capacity to formerly high-yield routes meant that this became impossible, and price cutting - often to the bone - became the norm. As Asia bounces back, excess capacity should gradually be mopped up and price wars are likely to be called off, but it will take more than this to rescue yields over the longer term.
In Europe, British Airways is pioneering a strategy that focuses almost wholly on the yield crisis, targeting business travellers at the expense of economy travellers. To this end it has down-scaled aircraft size, increased the ratio of business-to-economy seating and is overhauling its cabin product in a bid to justify relatively high ticket prices. US carriers will be watching with interest and some, particularly American Airlines, are likely to follow.
For others, problems run much deeper; net losses the size of that suffered by TWA cannot be sustainable in the long term.
Source: Flight International
