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At The Gate: A commercial success

Global airlines rebounded faster than expected from the recession in 2010, but prospects for the New Year aren’t nearly as rosy, according to the International Air Transport Association.

After losing nearly US $26 billion in 2008 and 2009, the IATA revised its profit forecast last year. Airline profits for 2010 when all the numbers are tallied will likely total $8.9 billion on revenue of $560 billion, compared to an earlier forecast of $2.5 billion profit on sales of $545 billion.

But 2010 “is as good as it gets,” according to IATA head Giovanni Bisignani. “It will be the peak of the cycle. 2011 will be a much tougher year,” he said. Global airline profits are projected to fall to $5.3 billion in 2011 as government stimulus spending slows, some countries implement austerity measures and unemployment rates remain high in developed nations. IATA expects crude oil to rise to $93 a barrel, helping to raise the industry’s overall expenses to $575 billion in 2011 from $539 billion in 2010.

On the domestic front, Air Canada has a pretty “robust” outlook, according to airline analyst Tasneem Azim of UBS Securities in Toronto.

“As far as demand is concerned on the international market, yields and traffic are growing, which should help balance a weaker domestic market as long as fuel prices don’t go back up to $100,” he said. “Air Canada is redeploying a lot of capacity to the international market, but so are their U.S. competitors.”

Azim said the domestic market is a crap shoot due to the uncertainty of whether U.S. travellers will increase visits to Canada, while WestJet is adding capacity, which puts pressure on its yields.

“Their west coast and sun destinations are strong, but they’re adding a lot of capacity. They signed a deal for more aircraft to come on line and while they did a deferral on some aircraft deliveries, they can only defer for so long. The focus (for Air Canada and WestJet) will be on who can manage costs better than who can manage growth.”

Both Air Canada and WestJet should have decent years in 2011, according to Karl Moore of McGill University’s faculty of management.

“The key is the Canadian and U.S. economies are doing better, while Air Canada is doing a lot of things to reduce their costs and improve their balance sheet,” Moore said. “The unions understand they have to get their costs down to compete with WestJet.”

Air Canada will continue to grow its Asian Pacific routes and will also benefit from synergies through its Star Alliance partners, especially Lufthansa and United Airlines, said Moore. And WestJet should see incremental growth through its new partnership with Cathy Pacific.

And while Porter Airlines now has to share space at Billy Bishop Toronto City Airport with Air Canada’s Sky Regional Airlines and Continental Airlines, Moore said Porter will make money from leasing gates and counter space to its new neighbours and from new retail shops that are being built at the downtown airport.

But one industry analyst sees trouble ahead for Porter with the arrival of competition.

“Porter more or less survived in Toronto because of its monopoly,” said Rick Erickson, president of Calgary-based RFP Erickson & Associates. “They’re barely flying above 50 per cent capacity, so it won’t take Air Canada much to hurt them, say maybe take 10 seats a flight away from them. It will be interesting to see where Porter is a year from now.”

The industry as a whole, however, should be in for a good year, barring any uncertainties such as higher fuel prices or a pandemic, said Erickson, noting that yields firmed up in the third quarter of 2010.

“There’s a comfortable duopoly between Air Canada and WestJet who are playing the yield game instead of going after market share,” he said.

But the delay of deliveries of Boeing 787s has hurt Air Canada more than they will admit and has prevented them from opening new routes and going back to some routes they abandoned, especially in Europe, Erickson said.

Air Transat has a very strong presence in the transatlantic market and should continue to do well, Erickson continued. But sun spot destinations are very competitive and as a vertically integrated company, Transat AT probably makes more money selling its hotel rooms (some of which they own) and airport transfers than airplane seats.

It should make for a very intriguing year in the commercial airline industry.

Brian Dunn is a Wings writer and columnist.