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Low Yields, Rising Costs Keep Airlines in the Red

December 15, 2009 By: George Dooley

The airline industry’s financial outlook for 2010 is grim. Sparked by low yields and rising costs, the International Air Transport Association (IATA) revised its forecast for 2010 to an expected $5.6 billion global net loss, larger than the previously forecast loss of $3.8 billion. For 2009, IATA maintained its forecast of a $11 billion net loss.

"We are ending an Annus Horribilis that brings to a close the 10 challenging years of an aviation Decennis Horribilis," said Giovanni Bisignani, IATA’s director general and CEO. "Between 2000 and 2009, airlines lost $49.1 billion, which is an average of $5 billion per year."

North American carriers will see losses reduced from $2.9 billion in 2009 to $2 billion in 2010. The relative improvement is largely the result of pricing power and cost reductions gained through capacity adjustments, IATA said.

"The worst is likely behind us," said Bisignani. "For 2010, some key statistics are moving in the right direction. Demand will likely continue to improve and airlines are expected to drive down non-fuel unit costs by 1.3 percent. But fuel costs are rising and yields are a continuing disaster. Airlines will remain firmly in the red in 2010 with $5.6 billion in losses. The number of travelers will be back to the peak levels of 2007, but with $30 billion less in revenues. The $38 billion cash cushion built up throughout this year will help airlines survive through the low season, but there is no recovery in sight for 2010. Tough times continue.

"The industry is structurally out of balance," added Bisignani. "The precipitous fall in yields will likely never be fully recovered. It is difficult to see how this can be balanced on the cost-side of the equation. After almost a decade of cost cutting, non-fuel unit cost reductions will be incremental at best. And the risk of rising fuel costs will be constant. There will be some individual airline success stories. But without relaying the foundations of the industry to facilitate structural change, covering the cost of capital for this hyper-fragmented industry will remain a dream at best.

"Consolidation is the great hope for the industry," Bisignani continued. "The round of consolidation experienced since this horrible decade began is a step in the right direction. But it has been confined within political borders as a result of ownership restrictions in the archaic bilateral system. The industry cannot afford the mounting losses of the status quo. The next decade must facilitate consolidation."

IATA forecast highlights include:

Revenues: Industry revenues are expected to rise by $22 billion (4.9 percent) to $478 billion in 2010, compared to 2009. However, revenues remain $57 billion (-11 percent) below the peak of $535 billion in 2008 and $30 billion below 2007 when passenger traffic was at similar levels to what is expected in 2010.

Passenger Demand: Following a decline of 4.1 percent in 2009, passenger traffic is expected to grow by 4.5 percent in 2010 (stronger than the previously forecast 3.2 percent in September). A total of 2.28 billion people are expected to fly in 2010, bringing total passenger numbers back in line with the peak recorded in 2007.

Yields: In 2009, passenger and cargo yields plummeted by 12 percent and 15 percent respectively. Cargo yields are expected to improve by 0.9 percent in 2010. But passenger yields are not expected to improve from their extraordinary low level. This is being driven by two factors: excess capacity in the market and reduced corporate travel budgets. Capacity adjustments in 2009 were made at the expense of lower aircraft utilization (down 6 percent). An additional 1300 aircraft due for delivery in 2010 will contribute to 2.8 percent global capacity growth, putting continuing pressure on yields. On top of this, corporate travel buyers have adjusted their budgets to reflect lower premium fare levels.

Fuel: An average oil price of $75.0 per barrel (Brent) is expected in 2010, up considerably from the $61.8 average expected for 2009. As a percentage of operating costs, fuel will be 26 percent in 2010. This is considerably lower than the 32 percent of operating costs that fuel comprised in 2008, but twice the 13 percent of operating costs that fuel represented in 2001-2002.

Cash: Over 2009, the industry raised at least $38 billion in cash ($25 billion from capital markets and US$13 billion from aircraft sale and leasebacks). The ratio of cash to revenues improved for European and North American airlines, but was flat for Asia-Pacific carriers. This will provide a cash cushion for the approaching first quarter’s seasonally weak traffic lows.



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