Global Airline Industry Rebounds, Will See Profit in 2010 From Recovering Economy

The International Air Transport Association (IATA) yesterday (Monday) raised its airline industry outlook and now expects airlines to post a $2.5 billion profit in 2010, recovering from two years of ailing business.

The IATA said increasing passenger travel, a climb in cargo trade, and effective cost cutting measures will contribute to accelerating the industry's rebound.

"The global economy is recovering from the depths of the financial crisis much more quickly than could have been anticipated. Airlines are benefiting from a strong traffic rebound that is pushing the industry into the black," IATA Director General Giovanni Bisignani said.

Previous industry predictions forecast a $2.8 billion loss. However the IATA revised its expectations for passenger traffic and cargo volume. Passenger traffic will grow 7.1% this year, up from the IATA's original prediction of 5.6%, and cargo volume will grow by 18.5%, up from the earlier estimate of 12%. Total revenue for the industry will be about $545 billion, up 13% from $483 billion in 2009, the group said.

Moody's Investors Service upgraded the industry's outlook Monday to stable from negative, saying they "expect profitability in the global airline sector to improve as we gain distance from the 2009 trough of the recession."

Bisignani cautioned that the recovery is fragile and that labor unions must prepare for more budget reductions.

"The challenge to build a healthy industry requires even greater alignment of governments, labor, and industry partners," he said. "They must all understand that this industry needs to continue to reduce costs, gain efficiencies and be able to restructure itself if it is to be sustainably profitable."

Airlines were hit hard during the economic downturn with a $9.9 billion loss in 2009 and $16 billion hit in 2008, but the cyclical movement of the airline industry has now swung back to favor companies. Merger and acquisition activity has contracted the number of seats in the sky, and ticket prices have started climbing again as demand grows twice as fast as supply.

United Airlines parent UAL Corp. (Nasdaq: UAUA) and Continental Airlines, Inc (NYSE: CAL) announced May 3 they were merging to create the world's largest airline.

"We think this merger is extremely positive for both companies and for the industry," said Morningstar analyst Basili Alukos. "With the reduction of another management team, the industry should have tighter control on capacity, as the top four airlines United-Continental, Delta Air Lines, Inc. (NYSE: DAL), American (NYSE: AMR) and Southwest Airlines Co. (NYSE: LUV) will control roughly 70% of the domestic capacity in the United States."

JPMorgan Chase & Co. (NYSE: JPM) analyst Jamie Baker is even more optimistic for this year's airline performance and predicted last month that the nine largest U.S. carriers will see 2010 earnings of $4.7 billion.

"The broader thesis is unchanged; manageable fuel, tight supply, incremental revenue streams, disciplined managements and rapidly recovering demand portend a multiyear profit run for U.S. operators, in our view," Baker wrote in a report.

Airlines need a profitable year to regain footing after borrowing billions to survive the big losses of 2008 and 2009. The six largest U.S. carriers - AMR Corp., UAL Corp., Delta, Continental, U.S. Airways Group, Inc. (NYSE: LCC), and Southwest - have combined debt of $27.4 billion, according to

"If you go back to a period when airlines were somewhat stronger, say 2007, early 2008, yes, clearly the airlines' balance sheets have eroded since then, both because of losses and additional debt taken on to maintain liquidity," said Philip Baggaley from Standard & Poor's Rating Service. "[T]he additional capital-raising they did mostly late last year was important in order to boost their liquidity, which was getting worrisomely low."

As investors turn back to the industry, stocks to consider include AirTran Holdings, Inc. (NYSE: AAI) and Hawaiian Holdings, Inc. (Nasdaq: HA).

"[AirTrain] is a low-cost provider with a defendable strategic plan," Helane R. Becker, transportation analyst and managing director at Jesup & Lamont Securities, told Barron's. "[Hawaiian Airlines] is the only U.S. airline that can use Honolulu as a hub and serves the South Pacific, Australia, New Zealand, Southeast Asia and the Philippines. And they can also serve the North Pacific, Japan and Western Russia. It's a small airline with an international strategic plan, and I like that funkiness."

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Asian airlines are also expected to thrive, with China's airlines profiting from the country on its way to becoming the largest tourist destination. China Eastern Airlines Corp. Ltd. (NYSE ADR: CEA) and China Southern Airlines Limited (NYSE ADR: ZNH) are among China's top three airline stocks and have climbed 7% and 19% in the past six months, respectively.

Industry experts also expect airline optimism to help Airbus SAS parent the European Aeronautic Defense and Space Company (EADS) and The Boeing Co. (NYSE: BA). Both are said to be working on deals with customers that might be unveiled at the upcoming Berlin Air Show.

Bad News for Europe

Not everyone will benefit from the airline industry's return to profitability, as European airlines are still expected to suffer a combined loss of $2.8 billion this year due to weak economies, labor disputes and revenue losses from Eyjafjallajokull's disruptive volcanic ash. Over 100,000 flights were cancelled in April and early May due to Iceland's volcano, and Europe's carriers will see red until at least 2011.

IATA's Bisignani criticized European leaders for failing to develop a single airspace and limiting the industry's growth. Instead of a unified traffic management system, Europe's sky is broken into small pieces of usable airspace controlled by different governments. The creation of a "Single European Sky" would cut down on airline costs and reduce carbon emissions by 12%.

"The ash crisis was an embarrassing wake-up call for European governments," Bisignani said. "We need leadership to deliver the Single European Sky, fair passenger rights legislation and continent-wide coordination."

Europe's airlines are also facing labor union disputes with no compromise in sight. Monday marked the 20th day British Airways PLC (OTC ADR: BAIRY) was dealing with a strike by its cabin crew protesting the airline's decision to cut some flights' crew numbers. The strike is costing British Airways $10.1 million a day.

Chief Executive Officer Willie Walsh said he was standing his ground and would not give in to workers' demands because employees need to understand the company must cut back to remain competitive.

"We're going to hold out for as long as it takes," Walsh told delegates during a debate at an IATA meeting in Berlin. "We are in an industry that needs to change. We cannot ignore the inefficiency we see."

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