Airlines: The worst may be over for airlines. But that is not the same as saying there will be a strong recovery.
Airline shares outperformed a rising stock market over the summer. It’s not hard to see why sentiment towards this pummelled sector has warmed. The traffic slump is finally stabilising, according to the International Aviations Transport Authority. Heathrow, the world’s largest airport, had its busiest month ever in August. The global economy seems to be on the mend.
But a strong rebound in airline profitability is still pie in the sky. Planes may be flying full, but that is thanks to cut-price fares. IATA says average passenger yields will still be down 12 per cent this year from the last, following a 20 per cent drop business travel.
Any other industry would respond by taking out capacity. And that has happened to some extent – especially in the US, but also in Europe where Lufthansa has led consolidation and British Airways has cut capital expenditure. But the industry has not gone far enough.
European airlines are still adding aircraft and taking on billions of euros of debt in the process. Only some of these planes are replacing old models. Others will bloat already crowded hangers. Meanwhile, airlines have not cut costs fast enough to keep up with falling sales, tipping them into deep losses this year.
For all the improvement in overall traffic numbers, business travel – the lucrative part of the sector – is still anaemic. Historically, business traffic has tended to pick up amid expectations of economic recovery. But there are mounting fears that this downturn has forced a structural change in flying habits.
A recent travel survey by Swiss bank UBS found that 73 per cent of companies in the US had cut travel in favour of alternatives like video conferencing.
More From This Section
Firms have also become accustomed to lower ticket prices, making it difficult to recover pricing power in the short term. So while the business traveller will stage a comeback, this may not be quite the shot in the arm the industry is looking for.
IATA is forecasting the industry to make $6 billion in operating profits next year. At this point, such predictions sound far too optimistic.
