CHICAGO, April 13, 2011 /PRNewswire/ -- Today, Zacks
Equity Research discusses the Airlines Industry,
including: Delta Air Lines (NYSE: DAL), United
Continental Holdings Inc. (NYSE: UAL), Southwest
Airlines (NYSE: LUV) and AirTran
Holdings (NYSE: AAI).
(Logo: http://photos.prnewswire.com/prnh/20101027/ZIRLOGO)
A synopsis of today's Industry Outlook is presented below. The
full article can be read at
http://www.zacks.com/stock/news/51121/Airline+Industry+Outlook+-+April+2011
In a major turnaround, the airline industry recorded
$16 billion in profits last year,
after losing $16 billion in 2008 and
$9.9 billion in 2009. But 2010 was
most likely an earnings peak, as a host headwinds have come
together to bring down industry profits.
The International Air Transport Association (IATA) expects 2011
profits softening to the level of $8.6
billion from its previous expectation of $9.1 billion. The factors weighing on earnings
include the escalating fuel prices, weak traffic volumes and the
March 11 catastrophe in Japan, which are expected to suppress demand
for air travel.
Worldwide air freight volumes rebounded in 2010 to the 2008 peak
level. This rebound was particularly apparent in Asia, where volumes were well above previous
peak levels established in 2007. Air freight is expected to be
unchanged in 2011 due to excess capacity and yield pressures as
demand softens.
As stated by IATA, Asia-Pacific
is expected to generate $3.7 billion
in profits in 2011, the highest in the industry, outstripping other
regions. However, the region's profits would be down substantially
from the 2010 level of $7.6 billion.
Despite the strong economic growth, aggressive inflation measures
in China are weakening the demand
for air travel in the country.
North American carriers are facing challenges from rising fuel
prices. Profits in the region will likely fall to $3.2 billion from $4.7
billion reported in 2010. Growth in Europe is also lagging due to the ongoing
banking and government debt crisis. European airlines' profits are
expected to drop to $500 million in
2011 from $1.4 billion in 2010.
The African air carriers are expected to break even in 2011
compared to profits of $100 million
made in the prior year. Strong economic growth and high demand for
air travel will be offset fully by intense competition from Middle
Eastern carriers. Middle East air
carriers reported 2010 profits of $1.1
billion. The IATA expects this profit to slide to
$700 million in 2011, owing to
political instability in that region. Latin American carriers'
profits are also expected to decline to $300
million from $1 billion in
2010.
Persistently rising fuel prices since last December have
surfaced as a major headwind to the airlines industry. Crude oil
prices are currently trading around $110 per barrel, representing the steepest rise
in more than two years. Oil prices have already risen more than 21%
this year due to the ongoing economic unrest in the Middle East.
Following the massive earthquake and Tsunami in Japan on March
11, air carriers introduced drastic cuts in their capacity.
Fears of flying to Japan are
increasing, owing to the still-unsettled nuclear situation, and the
demand for air travel in the country is dropping, hurting the
overall airline profitability.
However, the carriers will likely be able to handle this
situation as conditions stabilize in Japan. In all probability, the capacity cuts
are temporary, and should last only for the next two–three months.
Also, the carriers are combating rising fuel prices with higher
fares and extra fees.
OPPORTUNITIES
We believe industry consolidation and various ancillary revenues
will boost profitability and cost performance of most air carriers
going forward. This is an opportune moment for companies to
consolidate in order to regain their lost profits post-recession
and operate more effectively.
Ancillary Revenue: A number of supplementary revenue
streams helped the airline industry gain ground in 2010 after two
years of drought. The airline companies are enforcing fees on
baggage, reservation change, pet travel, food and beverage to add
to their revenue streams. These are expected to enhance revenues in
2011. The IATA projects total revenue of $594 billion for 2011, up slightly from
$565 million reported in 2010.
Consolidation: Airline companies are consolidating
in order to restore profits. The first consolidation in the
industry was Delta Air Lines' (NYSE: DAL)
successful acquisition of Northwest Airlines in 2008. The merger
catapulted Delta to the position of the second largest airline in
the world, generating significant cost savings for both.
In October 2010, United Airlines
merged with Continental Airlines and formed a new company
-- United Continental Holdings Inc. (NYSE:
UAL). This merger created the world's largest airline, overtaking
Delta Air Lines.
The third merger, between the discount leader Southwest
Airlines (NYSE: LUV) and fellow discounter AirTran
Holdings (NYSE: AAI) announced in September 2010, is underway. The acquisition of
AirTran represents a unique opportunity for Southwest to expand its
presence in key markets. Southwest will gain a valuable market
presence in Atlanta, the busiest
airport in the U.S. The transaction is expected to complete in the
second quarter of this year.
Technology Upgrades: Air carriers are involved in
numerous technology upgrades and system automation for various
activities such as airline reservation system, flight operations
system, website, maintenance and in-flight entertainment systems.
These upgrades enable companies to perform better, lower costs and
enhance customer service.
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