An Airline Recovery May Be No Recovery At All

The IATA, the voice of the global airline industry, says that business has returned to pre-recession levels. There are still some troubles that could keep costs high and undermine the recovery. But, for now, the news is generally good.

In a news release the organization said:

The International Air Transport Association (IATA) announced traffic results for April which showed a rebound in international markets with 16.5% growth compared to April 2010. While this is exaggerated by the comparison to April 2010 during which European airspace was closed due to the volcanic ash crisis, international travel markets in April had grown to reach a level 7% higher than the pre-recession peak of early 2008.

Traffic may remain strong for a bit, but fuel prices are likely to hurt profits, even with the fuel surcharges added to ticket prices. Those surcharges may not make up for margin compression, so industry profitability is still in question. It is any wonder that shares in airline companies trade near 52-week lows?

The resurrection of the airline industry has come at a terrible cost to some parts of the global economy. The drive to profits has caused a wave of consolidations. Delta (NYSE: DAL) took over Northwest. Continental (NYSE: CAL) and United Airlines combined. JAL went into Chapter 11 because of long-time losses. Overseas combination of carriers also rose rapidly. The most visible was the merger of British Airways and Iberia, an odd combination of UK and Spanish interests.

These marriages have had the expected effect. Layoffs have gone into the tens of thousands. The figure alone at JAL was 16,500. The eventual job cut numbers could go well above 100,000 when both direct employees and ground personnel at airports and catering services are added.

The airline industry may also be in the process of killing its own recovery. The economy has softened again. This usually leads to a drop in ticket purchases both by businesses and individuals. Surcharges on tickets will only make traveler more reluctant to fly. The economic cycle will turn against the industry

April may have been a good month for the airline business. The balance of the year is unlikely to be.

Douglas A. McIntyre