Airline Economic Outlook is Positive

The Air Transport Association (ATA) predicts an industry-wide profit of $3.5 billion to $4.5 billion in 2008, the first time that the major U.S. airlines will report three consecutive years of profit since 1998-2000. The 'black ink' will come despite rising fuel costs and a softening economy. ATA Chief...

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The Air Transport Association (ATA) predicts an industry-wide profit of $3.5 billion to $4.5 billion in 2008, the first time that the major U.S. airlines will report three consecutive years of profit since 1998-2000.

The 'black ink' will come despite rising fuel costs and a softening economy.

ATA Chief Economist John Heimlich says in his 2008 Economic Outlook that for 2006-2007, the U.S. airline industry is expected to show the first back-to-back net profit since 1999-2000. "While the profit margin will undoubtedly be subpar by typical corporate America standards, the two consecutive years of profitability come as welcome relief after an unprecedented five-year loss of $35 billion," the economist stated.

Stated Heimlich: "In the face of uninspiring forecasts for the U.S. economy and yet another record year for crude-oil prices, the nation's carriers have moved aggressively to redeploy assets and adjust aircraft utilization to trim unprofitable flying.

"All signs point to another year of improving fuel efficiency, despite air traffic congestion and resultant taxi-out and airborne delays," he added.

He said comparable load factors are likely to be accompanied by individual airline efforts to realize higher yields by increasing business travel as a share of total traffic.

Heimlich noted that passenger and cargo demand is surging globally, making the airline business increasingly global. In the domestic marketplace the established airlines are competing not only with new-entrant carriers, but also, increasingly, with other forms of aviation such as air taxis or business jets, which, continue to benefit from an outdated tax scheme.

"U.S. airlines and their employees have done an exceptional job of positioning their companies to weather record-high fuel prices. Consider that in their three best years, 1997-1999, the deregulated U.S. airline industry earned a net profit margin of only 4.4 percent on an average crude oil price of only $18 per barrel. A decade later, with oil likely to average $80 per barrel, we are projecting a third consecutive year of net profits. Global competitiveness, however, demands far more. If the United States is to meet that challenge, the airlines' path to economic vitality must not be impeded," he believes.

Meantime, Eurocontrol says Europe set a new annual record for flights with a 5.3 percent increase in 2007, and further growth of more than four percent is expected for this year.

There were about 10 million flights in Europe last year, according to Eurocontrol data. Average daily flight volume was 27,676 a day, up from 26,286 in 2006. Eastern Europe saw the largest increases, with several states recording growth of around 20 percent.

Growth was driven mainly by low-cost carriers, a sector that saw a 25 percent flight increase. Business aviation also experienced 10 percent growth. These two sectors accounted for nearly all the net growth.

Flights are expected to increase by 4.2 percent in 2008. The largest increases are likely to be in countries along the Adriatic Coast, Poland and the Baltic states.

But in 2007 11 percent of flights were delayed, up from just under 10 percent in 2006. ATC flow management delays increased from 1.9 minutes per flight in 2006 to 2.1 minutes in 2007. Flow management delays are expected to exceed three minutes in the summer of 2008, compared with 2.6 minutes in the summer of 2007.

Meanwhile, the International Air Transport Association (IATA) released traffic results for November 2007, showing a passenger demand surge to an 18-month high.

Year-on-year international passenger demand rose 9.3 percent in November, the fastest growth rate recorded in 18 months. This is higher than the 7.7 percent growth recorded in October and the 7.5 percent growth recorded over the first 11 months of 2007.

Average international passenger load factors were 75.4 percent in November, 1.1 percentage points higher than in November 2006. And passenger demand results were strong across most regions. But freight growth continued to be sluggish, reflecting strong competition with sea shipping and uncertainty over the economic outlook for 2008.

"It's a mixed picture," said Giovanni Bisignani, IATA's director general and CEO. "The global economy ended 2007 on a surprisingly strong note. The November surge in passenger demand has been critical in combating high oil prices and helping airlines end 2007 with an industry profit of US$5.6 billion, the first since 2000. But against a backdrop of robust world trade, sluggish freight growth continued to be a disappointment.

"We ring in 2008 with a warning bell. Passenger demand growth is expected to fall to five percent. And the expected increase in freight demand growth to 4.3 percent will only help us recover some of the ground lost against sea shipping. High oil prices and the impact of the credit crunch will see industry profitability slip to US$5 billion in 2008.

"Since 2001, efficiency gains have been impressive: 64 percent improvement in labor productivity, 25 percent reduction in sales and marketing unit costs and a 16 percent decrease in non-fuel unit costs. The challenge for 2008 will be much more of the same--- efficiency everywhere," said Bisignani.