The Global Airline Industry Gets a Downgrade

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Boeing (NYSE: BA) and Airbus may have upgraded their estimates for future orders. Many large airlines may be marginally more profitable this year than they were last. But the world’s largest airline association does not appear to give any of those numbers much weight. The International Air Transport Association says that 2011 will be hard on the airline industry and next year will be worse. That is based on the fact that airlines have not learned how to control capacity and increase prices, particularly in the U.S.

“In its first look at 2012, IATA is projecting profits to fall to $4.9 billion on revenues of $632 billion for a net margin of just 0.8%,” the organization reports. The forecast is based on 2.5% global GDP growth this year and 2.4% in 2011. The IATA analysis of the industry’s long-term profits trend is that “Whenever GDP growth has slowed below 2.0% the airline industry has lost money.”

A global forecast is not global at all. Even the IATA concedes that. The organization expects Asia to be the most profitable market, but that will be tempered by the aftershocks of the Japan earthquake. The IATA anticipates the region’s economy will continue the rebound it has seen this year. That supposes that the economy of China, primarily, can dodge a GDP slowdown in the rest of the world.

As would be expected, the IATA worries about North America, particularly the U.S. That concern may be misplaced. Airlines in America have already begun to cut capacity and that has helped keep ticket prices high. U.S. carriers have also effectively raised their income per passenger mile through charges for everything from baggage to on-board meals. The large American airlines may face lower revenue. However,  they have learned from the past that taking planes out of service and charging those people who do fly high rates for the remaining seats keeps margins high even as fuel remains expensive and travel activity remains weak.

After years of poor management, U.S. carriers have finally found intelligent ways to maintain margins, no matter what it costs the public.

Douglas A. McIntyre

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