Lift in Profits for Global Airline Industry in 2010

by: Investment U

by Tony D'Altorio

After its nosedive in the recession, the global airline industry is now enjoying far less turbulence.

The airline industry lost $16 billion in 2008 and $9.9 billion in 2009. But 2010 dealt with it much more kindly, doling out a total of $15.1 billion in profits.

And despite recent predictions of $5.3 billion, the International Air Transport Association (IATA) now foresees a 2011 net industry profit of $9.1 billion. With stable fixed costs, increased passenger numbers and revenues have gone right to airlines’ bottom lines.

However, they’re nowhere near returning even half the cost of capital. And the IATA estimates “pathetic” 2010 profit margins of 2.7% and an even worse 1.5% in 2011.

The Association’s director general and CEO, Giovanni Bisignani, warned: “The industry is fragile and balancing on a knife edge. Any shock could stunt the recovery.”

Certainly, European airlines expect collective profits of just $400 million last year. And in 2011, that number should drop to $100 million.

Bisignani called that $400 million “peanuts” considering how it was a mere four times larger than African airline profits… despite having an industry 13 times larger.

They compare badly to their Middle East competition too. Those airlines made $700 million in 2010 on only a quarter the revenue.

North America fared much better last year, earning $5.1 billion according to estimates. But out of the global industry, Asia takes center stage without a shadow of a doubt.

Asia’s Star Performers

In 2009, passenger traffic across Asia outstripped North America for the first time ever. And 2010 figures should show them representing nearly half the global industry’s profits, with $7.7 billion… the largest amount of profit the region has ever produced.

According to IATA, much of that jump came from China’s economy. The country’s fast-emerging middle class has driven consumption upwards across the board.

Knowing that, many international airlines have spared no effort wooing Chinese travelers. High-end flyers expect pretty much get anything they want, including Starbucks coffee.

That makes sense seeing how first and business-class passengers represent the real cash cows of the group. They make up around 9% of flyers but supply over 40% of the profits!

And the IATA says that traffic is growing, expanding by 10.9% January-October 2010. Since economy-class passenger numbers increased by just 7.6%, airlines – especially in Asia – know very well whom to thank for that.

As Asia’s middle class keeps growing, its airline profits should stay strong too.

That’s especially true considering the growing demand for air links between its 15 mega-cities, each with over 10 million inhabitants. That equals a lot of passenger traffic… with many business travelers and first class passengers ready to book their tickets.

Airline Investments

Bisignani may have summed it up best in saying: “The world is changing in aviation, and it’s changing very, very quickly. Rapidly developing markets are shifting the industry’s center of gravity to the East.”

Naturally, the money followed that shift. The airlines with the largest market caps are now in the emerging markets, including:

  • Air China ADR (OTCPK:AIRYY) – $20 billion
  • Singapore Airlines ADR (OTCPK:SINGY) – $14 billion
  • Cathay Pacific ADR (OTCPK:CPCAY) – $12 billion
  • China Southern ADR (NYSE: ZNH) – $11 billion
  • LATAM, the result of Chile’s Lan Airlines ADR (NYSE: LFL) and Brazil’s TAM ADR (NYSE: TAM) merger – at $11 billion.

Europe-based Lufthansa ADR (OTCQX:DLAKY) and US-based Delta Airlines (NYSE: DAL) trail at $10 billion each.

Now, looking at passenger miles flown – a common measure of airline size – Delta still ranks first. AMR (NYSE: AMR) and United Continental (NYSE: UAL) take second and third, while Air China doesn’t even make the top ten.

But expect eastern demand to change that too soon enough, especially if Asian airlines turn to mergers the way U.S. carriers have in recent years.

In the past, airline stocks have performed poorly. But those in emerging markets are looking at very friendly skies in the years ahead.

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