Airline Weekly - April 12, 2010
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Airline Weekly - April 12, 2010

Good Morning? The recovery is underway, but beware of unpleasant side effects

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Cover Story

Good Morning? The recovery is underway, but beware of unpleasant side effects

It’s morning again in the airline industry. Or is it?

Suddenly, air traffic is growing again. So are yields. And so are load factors, cargo demand, business travel and tourism. Economies are growing again, and so is confidence—especially relative to the doomsday outlook of early 2009. The horrendous downturn, it seems, is finished.

This, unequivocally, is a good thing. As IATA says, industry financial performance should significantly improve this year and next. Even the many airlines that stayed profitable during the downturn—from intercontinental superstars based in low-cost regions (LCRs) like Emirates to LCCs like Ryanair—surely welcome a world that’s no longer on the brink of economic catastrophe.

But like most good medicines, the benign effects of rising economic production come with some nasty side effects, ones which airlines must be ready to confront. The most obvious is costlier fuel. After a roller coaster dip from almost $150 a barrel in the summer of 2008 to $33 in December of that year, prices stabilized in the $70 to $80 range, a level most airlines could live with following years of non-fuel cost cutting. But the average price in March was $81, the highest figure since September 2008, the month when Lehman Brothers collapsed and the global meltdown began in earnest. Last week it topped $86. Airlines have varying levels of hedge protection, but none will welcome another rise beyond the $100 mark.

There are other toxic side effects of economic recovery. The price of non-fuel inputs including workers and aircraft are likely to rise as demand for them grows. Pilot and mechanic shortages, too—problematic during the last industry upturn—may reappear. In addition, infrastructure constraints will again lead to costly delays, and attacks on airlines from environmental lobbies will grow louder.

Capacity, too, will start growing again, with all the inherent risk of outpacing demand growth. The siren song of growth promises higher productivity and lower unit costs but can lead to a scenario where too many seats fly empty. Carriers... (343 of 1375 words)

Also Inside this Issue:

The British Airways-Iberia merger is now a done deal. Might a United-US Airways merger be next?

The two were talking before the downturn and have resumed their discussions now that mere survival no longer preoccupies their time. Both are now comfortably liquid, way up in equity value and equally eager to stabilize the industry through consolidation. And unlike the America West-US Airways merger in 2005, which preserved two dying companies to the detriment of everyone else, a United-US Airways deal should help the whole industry by moderating price competition.

But big questions remain. Can labor hurdles be resolved? And how will Continental, which left United at the altar two years ago, react?

Speaking of reactions, what does Cathay Pacific think about the encroachment of Hong Kong Airlines? The Hainan Airlines-backed carrier is buying A330s and planning overlapping longhaul routes. At the same time, though, Cathay is extending its own influence in the greater Pearl River Delta region via Air China’s takeover of Shenzhen Airlines.

Back in the U.S., Spirit Airlines is experimenting with new pricing models and grabbing media attention by charging for carry-on bags. Is it a step too far or the wave of the future?

In earnings news, Turkish Airlines showed again why it’s a force to be reckoned with, while Portugal’s TAP showed that you can still get by with the help of some unique colonial routes—for the moment, anyway.

Next up on the earnings agenda: mainland Chinese carriers, which haven’t yet reported Q4 results.

About Airline Weekly

Airline Weekly is a subscriber-supported publication, paid for by readers who want a more interesting, more valuable read about the airline business. Each Monday, Airline Weekly reports who's flying where, new marketing approaches, fleet, finance and key airline and airport data. And, most importantly, Airline Weekly readers enjoy a critical context, insightful analysis and new ideas found nowhere else.

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