A Few Silver Linings but Many Black Holes in Airline Report

You can’t accuse the International Air Transportation Association of trying to sugar-coat the situation, not after it slapped a title of “Grim Prospects” on its most-recent projections for the global airline industry.

You probably saw the headlines from the report, which projects worldwide losses of $4.7 billion for airlines in 2009. That’s worse than the $2.5 billion that IATA was projecting in losses back in December.

The reason? “Demand has deteriorated much more rapidly with the economic slowdown than could have been anticipated even a few months ago,” says IATA Director General Giovanni Bisignani. Combine slumping revenues with rising debt and “the pressure on the industry balance sheet is extreme,” he says.

If you root around in the details, you’ll find there are a couple of mustard seeds buried in the finer print:

• Despite everything, North American airlines should turn a (very modest) profit this year. IATA says there are two reasons: 1) They’ve been more aggressive in slashing their route capacity; and 2) They weren’t as aggressively hedged on fuel prices, meaning they haven’t been locked into contracts at prices set during the peak of last year’s oil bubble.

• Falling airline yields mean that travel will be cheaper in 2009. Airlines are cutting fares, and will continue to do so, perhaps into 2010, Bisignani told reporters Tuesday. If your company, or your family, still plans to travel in 2009, it won’t cost as much.

• Fuel prices that averaged $99 a barrel in 2008 (peaking around $140) will hover in the $50 range through 2009, and that will save airlines billions. With lower prices — and the fact that capacity cuts mean airlines are flying fewer planes, thus using less fuel — the industry’s fuel bill should drop by more than $50 billion this year, IATA projects.

• Demand for air travel will continue to grow in the Middle East this year, although only by 1.2 percent. Still, it’s the only region in the world that’s projecting growth.

So much for the good news. The outlook spelled out in most of the report ranges from bad to really bad.

• While Middle Eastern airlines will see modest traffic growth, they’re adding planes faster than passengers. Those empty seats will lead to a projected $900 million in losses, IATA says. This is particularly bad news for Airbus, which has scored a lot of success in recent years selling to fast-growing Middle Eastern carriers. For example, 74 of the 198 firm orders so far for the A380 are to Middle Eastern airlines or leasing companies, most notably Emirates, which has booked 58; likewise, just about half of the 478 A350s on order are from Middle Eastern airlines or leasing companies, with Qatar Airways and Emirates accounting for 150 between them.

• Losses across Asia and the Pacific will be even steeper, IATA says, projecting a $1.7 billion loss for carriers in the region. That’s really bad news for Boeing;  as of last month, fully 29 percent of its record-large order book — more than 1,000 planes — were bound for Asian/Pacific airlines like Indonesia’s Lion Air (164 planes on order), Australia’s Qantas (96 planes) and Japan’s All Nippon Airways (88 planes, including the first 787s).

• With passenger demand falling, lower airline cash reserves and a tight credit market, IATA says it expects steep cuts to the number of airplanes that airlines will take over the next couple years, with the total deliveries from Airbus and Boeing falling to about 700 planes a year, from last year’s total of 1,100.

• Finally, IATA says 40 airlines worldwide have gone out of business in the crisis, airlines that had carried more than 11 percent of the world’s aviation passengers, including three U.S. carriers that went under in one week last year (Aloha Airlines, ATA and Skybus).

“It will be a grim 2009,” Bisignani says. “And while prospects may improve towards the end of the year, expecting a significant recovery in 2010 would require more optimism than realism.”