Welcome to the latest edition of IATA’s quarterly eAnalyst.
The eAnalyst is designed to provide a concise and insightful guide to the current key issues in the global airline industry.
In this issue we discuss how the outlook for airline profitability is improving on the back of traffic upturn and strengthening revenue environment, although at present it looks more like producing reduced losses in 2010 rather than a return to net profit. Several years’ growth has been lost and, although demand is returning, yields continue to be threatened by latent capacity growth and a number of costs are on the increase.
Our survey of airline business confidence in January showed further improvement in sentiment amongst CFOs and heads of cargo for the period ahead. 2009Q4 marked a change for the better in the business environment. Traffic and yield improvements are expected, although this will be tempered by rising costs. However, there was a significant geographical difference with Asia-Pacific airlines the most positive, Europeans the least positive.
Cyclical pressures may now be easing but the structural problems have not disappeared. Even in the boom years the industry’s ROIC has failed to pay investors what they would expect in other industries of similar risk. Consolidation would help. But rational capacity decisions require the ability to merge cross borders, which current regulations prevent. Analysis by IATA shows that size alone does not guarantee profitability. In this quarter’s analyst viewpoint section Boeing introduce a more optimistic view of air transport markets, sharing their impression of current developments and outlook for the future. Our policy issue section looks at ongoing work to assess how airports might compete, and what that might imply for regulation. We take a rather more sceptical view of the potential for competition to reduce the need for economic regulation in this sector, but certainly welcome its introduction wherever possible.
I hope you find it to be an interesting and informative read.
Brian Pearce
IATA Chief Economist
INDUSTRY PERFORMANCE AND OUTLOOK
Stronger traffic underpins upturn but risks remain
Passenger and freight traffic posted significant upticks towards the end of 2009 on the back of economic recovery and sets the stage for improved airline profitability – at least reduced losses – in 2010. With load factors now back to pre-recession levels, yields have also begun to turn up and we expect industry losses to halve from $11 billion in 2009 to $5.6 billion this year. However there is significant regional variation in this overall picture. Asia is expected to show earlier and stronger recovery compared to Europe and the US where growth is likely to be weak for the next few years. The return of excess capacity and ever present threat of oil price rises pose risks to a financially sustainable recovery.
Airline expectations continue to improve
IATA’s January 2010 survey showed improving sentiment across all indicators of airline business confidence. A majority of respondents indicated that profitability had improved in the final quarter of 2009 and 76% expect further improvement over the year ahead. Traffic conditions have improved dramatically and, while still reporting yield softness last quarter, respondents are increasingly positive about the revenue environment in 2010. However responses suggest that cost pressures are on the rise and employment will only stabilise rather than increase over the next 12 months. The improvement indicated by these survey results come over a very low base – there is much ground to be regained.
ANALYST VIEWPOINT
Boeing Market Outlook
by Randy Tinseth, Boeing
The industry faced unprecedented difficulties in 2009 due to economic recession. During this period the world’s aircraft manufacturers delivered more than 1,000 new jet aircraft including 481 from Boeing Commercial Airplanes. Boeing attribute this continued strong delivery performance to careful production planning and demand which remained strong in particular market segments. Looking ahead Boeing expects to deliver between 460 to 465 aircraft in 2010. By 2011 it sees the industry returning to profitability and forecasts 4.9% annual traffic growth over the next two decades.
RESEARCH TOPIC
Airline profitability
Analysis of the 2008 results for 233 major airlines shows that record fuel prices and the impact of the ‘great recession’ hit profitability across scale and business model. In line with earlier results, the results showed no evidence of straight forward correlation between size and absolute profits. Some LCCs, previously generating +10% margin, saw weaker performance in 2008 demonstrating that all business models were challenged by the environment. While there are no simple ‘fixes’, financial success requires cost synergies as well as network benefits which implies a need to move beyond current alliance relationships to the cross-border mergers seen taking place in other global industries.
KEY POLICY ISSUE
Preparing for a more competitive airports sector
by Nick Fincham and Alina Jardine-Goad, UK CAA
Any mechanism to inject competitive pressures into the airports sector would produce better outcomes for airline and their customers. The breakup of BAA's ownership of the London and lowland Scotland airports is a welcome first step. However, the nature of the market power remaining in the airports market is still likely to require economic regulation rather than reliance on Competition Law. Clearly any decisions on economic regulation of airports in the UK and elsewhere will require a means of measuring the degree to which airports can compete. This paper from the UK CAA sets out a study they are undertaking to do just this. Part of the process of improving airport regulation and injecting competitive pressures, where possible, will be to ensure that the outcome of this study reflects the first-hand experience of the industry in engaging with airports worldwide.
DATA UPDATE
Enhanced economic reports: video and chart data
Looking for further analysis and data relating to IATA’s regular economic briefings? Enhanced versions of the monthly ‘Air Transport Market Analysis’ and ‘Premium Traffic Monitor’ are now available for purchase. Each report contains the IATA data series (in Excel format) for the traffic charts presented in each report and a video commentary from IATA’s Chief Economist. The quarterly ‘Financial Forecast’ and ‘Airline Business Confidence Survey’ reports are also available in enhanced versions featuring video commentary and, for the confidence survey, chart series data.