Airline Industry Expects Huge Profits

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Airlines will make mammoth profits this year. The International Air Transport Association (IATA) revised its forecasts for the global industry higher–to $8.9 billion. In June, its forecast was only $2.5 billion.

The turnaround in the economy and fuel prices are critical to the estimates. “The improved outlook for 2010 is being driven by a combination of factors. On the revenue side increasing demand and disciplined capacity management are leading to sharply stronger yields pushing revenues higher. At the same time, costs remain relatively stable.”

Giovanni Bisignani, IATA’s Director General and CEO said that the improvement is not much of a salve for years of hard times. “The $8.9 billion profit that we are projecting will start to recoup the nearly $50 billion lost over the previous decade.”

The “cost” of the gains is substantial, and not sustainable. Airline lay-offs have increased due to mergers of large carriers line United (NASDAQ: UAUA) and Continental (NYSE: CAL) and Northwest and Delta (NYSE: DAL). These mergers may create the world’s largest airlines, but they do so in a way that damages the economy. Consolidation also almost always hurts customer service.

The airlines do not have much to add in the way of new fees for passengers or to cuts in service. Most airlines do not serve meals on short flights, but they do charge for luggage. Electronic check-in may allow the carriers to cut desk staff, but those cuts are one-time. New generations of air craft may drop fuel consumption, but that is one of the few ongoing benefits that airlines have found.

The single thing that is nearly certain about airlines is that they will eventually engage in irrational pricing to gain passengers. Price wars cut profits, but the trend has gone on for decades.

Profits may have returned to the industry, but in a way that is not sustainable.

Douglas A. McIntyre

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