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Airline industry remains strong despite recent setbacks

Aug. 20, 2014, Toronto - Amid crashes, rockets causing cancellations of flights to a key destination, brutal winter weather, an Ebola outbreak in some West African countries and now the impending threat of another volcano and a giant ash cloud, the airline industry should be looking at an annus horribilis.


August 20, 2014
By Greg Keenan The Globe and Mail

Instead, it is riding high, with major Canadian and U.S. airlines
reporting record financial results and even battered European airlines
starting to turn things around.

“I guess it’s a tale of two cities,” said industry consultant Robert
Mann, who heads R.W. Mann & Co. in Port Washington, N.Y. “In the
U.S. at least, you’ve got record earnings, albeit punctuated by factors
they can’t control.”

 

But the industry as a whole is in the best
shape it has been in years to withstand the shock arising from the
eruption of a volcano in Iceland, which the government of that country
warned earlier this week could be imminent, and growing fears of an
Ebola outbreak in parts of West Africa. Two airlines recently halted
flights to Liberia, Sierra Leone and Kenya over concerns about the
infection spreading via air travel.

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U.S. airlines in particular
are basking in the cleansing effects of chapter 11 bankruptcy protection
and a wave of consolidation that has reduced the number of major
carriers to four.


American Airlines Group Inc.,
which now includes American Airlines and U.S. Air after American
emerged from chapter 11 last December, had such a strong second quarter
that it is paying out its first dividend since 1980, making $2.8-billion
(U.S.) in debt and lease payments, plunking an extra $600-million into
its pension plans and repurchasing $1-billion worth of shares.

 

“This
isn’t a one-off situation,” American Airlines Group chief executive
officer Doug Parker said on a conference call discussing the company’s
second-quarter financial results last month. “This really is an
indication of how transformed this business is.”

 

That
transformation is reflected in the Bloomberg World Airlines Index, which
rose 0.18 per cent Tuesday to $86.01, despite an International Air
Transport Association (IATA) report that growth in international air
travel slowed to 2.4 per cent in June, compared with overall growth of
3.7 per cent in the first half of 2014.

 

The consolidation of U.S.
airlines means they are able to control pricing, said Mr. Mann, although
“of course, they have no control over economic cycles, they have no
control over geopolitical events, they have no control over the weather,
including volcanic weather.”

 

The IATA has estimated that a
six-day halt to flights over the North Atlantic caused by an ash cloud
from the eruption of a different volcano in Iceland in 2010 cost the
industry $1.8-billion.

 

Canada’s two major airlines are generally
insulated from such geopolitical events as the shooting down of a
Malaysia Airlines plane over Ukraine last month, said Robert Kokonis, an
industry consultant who heads AirTrav Inc. Air Canada, however, did
join other carriers in cancelling some flights to Tel Aviv in July when
rockets landed near that city’s airport.

 

All airlines, Mr. Kokonis noted, have benefited from the stabilization of jet-fuel prices, which began in mid-2013.

 

“It’s still quite high, but less volatile,” he noted. “Things have calmed down.”

 

In
recent months, jet-fuel prices have fallen, a critical factor for
airlines because fuel represents about one-third of their costs.

 

The wave of consolidation in the U.S. industry ended with the merger of American and U.S. Air last year.

 

While
the mergers that led to American, Delta Air Lines Inc., Southwest
Airlines Co. and United Airlines Inc. dominating the U.S. market have
led to price increases, the U.S. economy is starting to rebound to a
point where consumers can absorb higher fares and increased fees, Mr.
Kokonis noted.