But Some Analysts Think The Forecast Is Still Stormy

The CEO of the International Air Transport Association expressed "cautious optimism" that the international airline industry could see a return to profitability this year. Giovanni Bisignani made the prediction in a speech to the World Air Transport Summit and IATA General Meeting in Berlin, Germany on Monday,

Bisignani said that global traffic has climbed back to pre-recession levels with load factors nearing 80 percent, and that the bottom line for many airlines continues to improve. " Asia-Pacific is powering the upturn with $2.2 billion in profit," he said. "North American carriers will move into the black at $1.9 billion. Latin American airlines will return $900 million, the only region with two consecutive profitable years."

"Middle Eastern and African carriers will each deliver profits of $100 million," he continued. "But not all regions are recovering equally. Europe with its weak economy will be the only region in the red, with a $2.8 billion loss. But today we are upgrading our global industry forecast to a full-year profit of $2.5 billion. This is the first global profit since 2007. It is a reason to celebrate. But with a margin of 0.5%, it will be a modest party."

But, Bisignani  said, there are still serious challenges to be overcome. One is excess capacity. With fewer than half of the 1,340 aircraft expected to be delivered this year for replacement, airlines should be more concerned with profit than market share, he said.

He also pointed a finger at unions, saying "Labor, out of touch with reality, is the next risk. We cannot pay salary increases with our $47 billion in losses. Pilots and crew must come down to earth and strikes at this time are shortsighted nonsense. Labor needs to stop picketing and cooperate."

Taxes and the continuing volatility in the oil market will also continue to put pressure on the airline industry, he said.

Bisignani (right) said he has a "2050" vision for the future, that over the next 40 years, the success of the airline industry will be built on profitability, infrastructure, a new energy source, and the customer. He called on governments to take a leadership role in streamlining infrastructure improvements like new runways, as well as investing in biofuels. He also said that "In just a couple of decades, the demographics of our customer base will change dramatically. The middle class will nearly triple from 1.3 to 3.5 billion people. India and China will account for a quarter of these potential travelers." Having the capacity to serve that new customer base is key, Bisignani said, but the the answers to how won't be found in "isolation."

But the IATA's CEO said that the future holds much promise. "Now is the time to bring governments and partners on board to join us in building our future," he said. "You can be confident that, as always, your association is at your side, full of passion and commitment. We will build a resilient industry on our cornerstones of change. We will protect ourselves from cycles and shocks with sustainable profitability. We will exceed our customers’ expectations and we will be an industry that is even safer, greener and more successful."

But aviation analyst Frost & Sullivan said in a news release Tuesday that the real picture is somewhat grimmer, and that the linchpin will be fuel.

The analyst says that, should the Obama administration tighten drilling regulations, there may be an oil shortage between 2016 and 2018, driving fuel costs above $100 per barrel. With fuel costs representing roughly 40 percent of an airline's cost base, the same detrimental impacts as seen in 2007 and 2008 can be expected, they said.

As airlines attempt to control non-fuel related costs and increase their revenue potential, they face resistance from labor unions, especially of legacy airlines like British Airways, Lufthansa and American Airlines. It is the legacy systems dating from the 1980s that needs to change, as they are holding back the development of the airline industry. As airlines tackle the labor issues, there are other costs that can be saved and revenue synergies established to create a buffer against the inevitable challenges ahead.

The analyst says there are the typical airline alliances such as Star Alliance and SkyTeam, bringing in as many members as possible to create marketing and revenue synergies, and there are also cost alliances, such as the first ever low cost airline alliance between Air Asia and Jetstar. There are even partnerships across different business models such as Virgin Blue with Air New Zealand, American Airlines with JetBlue, and Jetstar with AirFrance-KLM. The future of the airline industry will definitely include more consolidation. It is the only way airlines will minimize cost and enhance revenue, given the conditions in which the industry operates.

Acquisition strategies, such as Lufthansa's, whose present portfolio includes Austrian, BMI, jetBlue and Swiss, together with more partnerships and joint-ventures in certain markets, such as the Delta-AirFrance KLM transatlantic joint-venture, will be key to cost reduction and revenue enhancement.

Tight regulation is a major hindrance to the growth of the airline industry, according to Frost & Sullivan. While an increase in bilateral agreements, open skies policies, and the creation of single-skies enhance the global economy, they also create a better operating environment for the airline business. However this process is slow and applies mostly to North America and Europe. The emerging markets in India, China, and Southeast Asia have yet to benefit from such changes. And even in North America and Europe, these benefits may be tempered once strict environmental regulations are imposed on the airline industry as early as 2012.

With stricter environmental policies being enforced worldwide, alternative fuels may provide a buffer for airlines taking part in the emissions trading scheme. Alternative fuel for aircraft is a challenge in its own right. The underlying problem is not whether it is scientifically possible, but the commercial viability of the alternative fuel to be produced on a commercial scale. Alternative fuels may not be commercially viable for the airline industry for another ten years, due to extensive regulatory approval requirements. Counting on alternative fuel as the solution to escalating fuel prices and environmental regulations is not prudent.

The bottom line, according to Frost & Sullivan, is that airlines need to continue reducing cost structures and enhancing efficiency in order to meet changing market conditions.

FMI: www.iata.org, www.frostandsullivan.com