Airline recovery threatened by weak global economy

SINGAPORE (Reuters): Global airline executives may be forced to slash industry profit expectations at their major annual conference next week as fears grow of a relapse in the world economy.

Buffeted by a series of shocks from Japan to the Arab world and by high oil prices, the International Air Transport Association (IATA) faces ominous signs the economic rebound that pulled many airlines out of financial trouble may be screeching to a halt.

Last year, the industry recovered faster than expected from the recession, posting a record profit of $16 billion, thanks to rising demand and moves to shed capacity. But IATA has said its recent 2011 forecast for $8.6 billion profits now looks optimistic.

Worldwide traffic rebounded 16.5 per cent in April, but this was distorted by the six-day shutdown of European airspace because of ash clouds from an Icelandic volcano a year earlier. In March, annual growth slowed two percentage points to 3.8 per cent.

“The airline industry often has to deal with setbacks, but there is real concern over the global economy,” said Howard Wheeldon, Senior Strategist at brokerage BGC Partners in London. “There are strengthening signs that it hasn’t reached the new low yet because of questions over consumer spending.”

While officials at the US Federal Reserve view a recent soft patch of US economic data as transitory, concerns of a deeper and protracted slowdown have grown.

It is an unsettling backdrop, even for an industry accustomed to lurching from crisis to crisis, as 700 top airline executives gather in Singapore for IATA’s annual meeting from 5 to 7 June.

The annual meeting had already been disrupted by unrest in North Africa, which caused a dip in air travel demand and prompted organisers to move the prestigious event from Cairo to Singapore.

IATA, whose 230 members claim to carry 93 per cent of global passenger traffic, updates its widely watched financial forecast for the $600 billion global airline industry on Monday.

Analysts say it is almost certain to signal a more cautious approach.

Crisis management

Last month’s second Icelandic volcano eruption had a more muted impact, but proved once again that crisis management has become a way of life for airlines and a test for investors.

Airlines have been plagued by one crisis after another in recent years from war and terrorism to volcanic eruptions, earthquakes, disease and now concern over a growing E.coli scare in Europe that could dampen travel and hurt air cargo shipments.

The US Arca airlines index has fallen 15 per cent in the past six months versus a nine per cent gain in the S&P 500. In Europe, travel and leisure stocks have fallen four per cent while leading shares on the FTSE Eurofirst 300 have risen four per cent over the same period.

A key question for investors is whether airlines will be able to maintain last year’s discipline and hold down capacity, which helps them to fill their planes and maintain seat prices.

That is not such good news for passengers, but does allow airlines to prop up the yield, or average revenue per seat sold.

IATA’s Director General Giovanni Bisignani warned airlines on Thursday against adding too much capacity too quickly, saying this would hit load factors and weaken income.

Many airlines appear to have already heeded the warning, with joint-venture partners Air France and Delta taking seats off North Atlantic routes in the coming winter and Lufthansa deciding to shed an Italian subsidiary.

The acid test could be what other IATA members say about their plans for capacity in the next northern hemisphere winter.

“It is going to be a challenge to continue matching demand to supply,” said airlines analyst Stephen Furlong at Dublin brokerage Davy. “For the industry to manage a return to health it has to be good at managing capacity,” he added.

Airlines face the additional handicap of high oil prices, which remain above $100 per barrel and make up some 40 per cent of operating costs, not all of which is passed on to passengers.

Even if oil prices stay flat, costs will rise as many firms have less favourable hedging contracts in 2012, Furlong said.

This year’s IATA summit could also offer more insight into growing trade tensions over air travel. Gulf airlines have clashed with Europe and Canada over landing rights, accusing governments of coddling national carriers by restricting rivals.

A separate row has flared up between China and Brussels over plans to include aviation in a European Union emissions trading scheme. Beijing argues this would increase costs and has threatened to buy fewer European jets, sources tell Reuters.