Airline Industry Gives Up on Profits

The International Air Transport Association, the airline industry’s large association, has nearly given up on the chance that the industry will make any money this year. The organization expects that, globally, airlines will make a 0.5% profit, which would be $3 billion, down $500 million from its December forecast. The prediction comes with a caveat, though. Tony Tyler, IATA’s Director General and CEO, said a spike in crude prices to $150 and a full-year average price of $135 per barrel would be “plunging the entire industry towards losses of over $5 billion.” The greatest threat to the industry is no longer a slowdown in the EU economy.

The airline industry already has been through a period of mergers recently, meant to cut costs, as well as Chapter 11 filings. Each was due to the recession. Some were triggered by high oil prices in 2008. These actions took a great deal of capacity out of the markets. Now, the industry must ask how much more it can cut from capacity without lowering service to a level at which it cannot serve some passengers. Airlines also may have to mothball more aircraft — some of which have lease costs.

The largest bankruptcies of the past two years were the ones filed by JAL and by AMR, the parent of American Airlines. Each involved cuts in debt and the layoffs of thousands. Neither guaranteed the future of the carriers. Each still operates in national and global markets with more healthy competitors. Chapter 11 may bolster the chances of survival, but it is no guarantee.

If the industry does pile up losses in the second half of the year, more banks will have to write down airline loans. Passengers will pay more — until they cannot afford to. The industry will be thrown back into another of the downturns that have been a regular part its past. The sector is a perfect example of one in which a single event can deal a terrible blow.

Douglas A. McIntyre