World Travel: Airlines Lining Up for Profits

The airline industry is poised for an almost unprecedented boom, as a new generation of planes is combining with better business models and huge volume growth in new markets.


FROM THE ECONOMIST

After losing $43 billion in five years, airlines are at the beginning of a massive boom

MENTION the airline industry in polite company and a few truisms invariably come trundling out: airlines are loss-making, inefficient, prone to extreme cycles and vulnerable to fickle consumers. Why, most of America's industry is currently bankrupt, flying on only thanks to that country's Chapter 11 cushion. Only an idiot would buy shares in British Airways (BA), which currently owes almost half its £3.5 billion ($6.1 billion) market value to its pension fund. And so on.

The trouble with truisms is that they can obscure big changes as they start to happen. In fact, the airline industry is poised for an almost unprecedented boom, as a new generation of planes is combining with better business models and huge volume growth in new markets. This year an industry with revenues of about $400 billion will end up paying $97 billion for its fuel. According to IATA (the International Air Transport Association), had the price of oil stayed where it was in 2003, at $30, instead of rising to the average $57 expected for the whole of this year, the world's airlines would have made more profit ($45.6 billion) than they have lost in the past five years. (This, says IATA, is also partly a result of a 34% improvement in labour productivity.)

But there is more to it than savage cost-cutting; traffic volumes are growing. International traffic has risen by 8.3% so far this year, compared with 2004. In America, total traffic is up by 5.4%; in Europe the rise is 6%. In Asia, IATA is forecasting continuing annual growth of 6.8% through to 2009: China and some east European countries will go on growing by around 10%.

But perhaps the most conclusive indication of brightening skies is the boom in aircraft orders that is stretching Boeing and Airbus production plants to the limit. Airbus is scouring Europe and farther afield for 1,000 engineers to push ahead with its new long-haul A350 250-300-seat plane and bring its super-jumbo A380 into service without adding to the six-month delay that has already pushed its first commercial flight for Singapore Airlines back to the end of next year. Boeing is booming even more, with about 650 orders under its belt already this year, compared with just over 400 for Airbus at the end of September. Some observers think Boeing could finish this year with almost 1,000 orders, while Airbus will net nearly 900. In a good year the two manufacturers usually share 800 orders between them. This year's numbers will be about a quarter higher than the record number of total orders set in 1989.

Because of the ongoing crisis among American carriers and the global worry over the high oil prices that have doubled jet-fuel costs to nearly $90 a barrel in two years, it is easy to forget the advances being made in many parts of the world. New no-frills airlines are springing up, not just in Europe (where there were around 50 at the last count), but in South Asia and the Middle East, too. India is liberalising its market, allowing foreign carriers such as Virgin Atlantic, bmi (formerly British Midland) and BA more flights. Passenger numbers have risen to 59.3m from 48.7m in the past year, thanks to the arrival of new local airlines such as Kingfisher and SpiceJet. In China consolidation has already taken place; seven small airlines have been folded into the big three--Air China, China Eastern and China Southern. Two and a half years ago Chinese carriers were zapped with the scare over the SARS disease, but their traffic recovered smartly within six months. China Eastern has just reported third-quarter results showing revenues up by 43% and profits more than doubling to 673m yuan ($83m), while China Southern reported net income quadrupling to 852m yuan in the past three months, compared with the same period in 2004.

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