Airlines Expect Massive Losses In 2010

Lower oil prices and a resurgent economy should help the airlines post improved results in 2010, but that expectation is hardly true. The industry lost $11 billion in 2010. The International Air Transport Association had expected losses next year to drop to $3.8 billion. Today, it revised that figure higher to $5.6 billion, and that may not be the worst of it.

The IATA does expect a modest improvement in revenue up almost 5% to $478 billion. Offsetting much of that, the industry’s margins will be badly damaged by a sharp increase in oil prices. The agency reports that the “average oil price of US$75.0 per barrel (Brent) is expected in 2010, up considerably from the US$61.8 average expected for 2009. As a percentage of operating costs, fuel will be 26% in 2010.”

The forecasts almost certainly mean that there will be more mergers and bankruptcies in the industry next year. British Airways recently announced a merger with Iberia. AMR (NYSE:AMR) and Delta (NYSE:DAL) are competing to put more than $1 billion into JAL for an ownership position and rights to share the Japanese carrier’s routes in Asia.

There has not been a major merger in the US since the Northwest tie-up with Delta last year, but large losses among American carriers could force those with debt-laden balance sheets to seek partners. US Airways (NYSE:LCC), which has limited routes overseas, may find it necessary to seek a combination with another carrier that has a larger international presence.

The anticipated losses will also make it more difficult for the most troubled carriers including JAL to make money. That means that the capital infusions from the Japanese government plans to put into its flagship carrier in addition to money that may come from a US airline may not be adequate to support the airline through next year.

Oil could still go higher in 2010, particularly if the recovery gains steam and demand in large nations including China and the US grows. That could push the global airline industry’s losses above $6 billion and it is not clear what the source of capital will be to cover those deficits.

Douglas A. McIntyre