Industry flies clear of the recession

07 June 1996

WORLD airlines are making money again as they emerge restructured and reinvigorated from the worst recession in their history. The initial tally by the International Air Transport Association (IATA) shows that airline profits on international scheduled services were $5,200 million in 1995. 'That is four per cent of revenue,' IATA Director General Pierre Jeanniot said in April. 'Putting it like that, it may not seem very high. But, in dollar terms, it is still an all time record!'

The airlines were overdue for something to celebrate. In the four years to 1994 they lost a combined total of $15,600 million. Many of them had to slash orders for new planes, cut capacity, lay off staff and launch top to bottom reviews of their operations. One result of the shake up is that airlines are turning a profit on a fairly modest recovery in demand. In the US, the number of passengers has not risen significantly but more of them are paying closer to full fares. The bargain deals that were readily available during the recession are rapidly disappearing. Passenger traffic at US airports rose by only 3 per cent in 1995. compared with 8 per cent in the Pacific, 7 per cent in Europe and 5 per cent in Asia.

In Europe, the airlines turned in a cumulative profit of just over $1,000 million in 1995, according to figures compiled by the Association of European Airlines. The profits were the first since 1989, but were not sufficient to erase the losses of $7,500 million that accumulated over the previous five years.

And the global figure masks a range of very different showings among the airlines.

British Airways, KLM and Lufthansa are increasingly profitable, while carriers such as Alitalia, Olympic and Iberia are deep in the red and have barely begun the process of internal reform. Arguments also rage about the subsidies that are still provided to state carriers like Air France, which is due to receive a FF 20,000 million ($3,870 million) cash injection from the French treasury.

In the Middle East there is a similar scene of transition, with many airlines in the midst of internal restructuring, fleet renewal and expansion schemes, capital enhancement or privatisation plans. The financial performance of many of the region's airlines is disappointing which is one of many reasons why plans for privatisation have made so little headway. Tunisia bucked the trend last July and floated 15 per cent of Tunis Air to a very positive response from local investors. However, the airline has regularly turned a profit, which is not the case with other regional airlines slated for a partial sell off.

Privatisation of Turkey's national airline has been deferred to 1997 at the earliest, and Gulf Air will have to return to profit before privatisation can be considered more seriously (see pages 8, 16).

Many of the region's airlines are putting new aircraft into service which should increase operational efficiencies so long as they can exploit the new capacity by putting paying passengers in the extra seats. Cyprus Airways was the only airline in the region to achieve a passenger load factor of more than 70 per cent on international services in 1994, the last year for which IATA figures are available. Most of the world's successful carriers achieve passenger load factors of 70 per cent or more.

The biggest transformation among regional airlines is about to get underway in Saudi Arabia, where the national airline is due to renew its entire commercial fleet.

Saudi Arabian Airlines (Saudia) has ordered 61 new aircraft from McDonnell Douglas and Boeing and is still in the market for smaller regional jets for its domestic network. The airline is to get a new livery and has begun consultations with potential domestic investors about possible approaches to privatisation.

Medium-term hopes for the region's airlines rest on a revival of the economies of the area. Air travel reflects economic activity very closely and growth rates across the region have fallen behind the world average, while per capita incomes are almost stagnant. There are exceptions, of course. Emirates is thriving on the continued buoyancy of Dubai and EgyptAir is profiting from a rebound in tourist arrivals.

Bullish prospects

The world's two largest airframe manufacturers, Boeing and Airbus, both remain bullish about the region, with very positive forecasts for passenger traffic growth and new plane demand over the next 15-20 years. Boeing expects air travel in the Middle East to expand at an average rate of 5.3 per cent a year during the next 20 years, with the highest growth occurring on routes to India. It also forecasts new plane deliveries worth about $47,000 million during the period.

In its most recent market forecast Airbus Industrie predicts that the airlines of the Middle East and North Africa will buy 911 aircraft worth $60,000 million by 2014. Airbus calculates that the total regional fleet will by then be two and a half times the size it was in 1994. Airbus expects regional traffic growth to grow by 5.9 per cent a year over the period which is second only to its growth forecast for the Asia-Pacific region.

However, as the retrenchment at Gulf Air suggests, the overall market did not grow at such rates last year and the short-term prospect is for a steady recovery rather than a spectacular surge in traffic. Nevertheless, population growth rates in the region are among the fastest to be found anywhere in the world. If the economies can expand fast enough to employ the growing population of the region, future demand for air travel will be assured.

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