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Aerospace Financial News from Aviation Week

Market Focus
Recent airline industry financial indicators recall a quotation often attributed to 19th-century British Prime Minister Benjamin Disraeli: "There are lies, damned lies, and statistics." Throughout 2010, year-over-year passenger traffic and revenue numbers suggest the industry is seeing strong results so far this year, although the reality may be a bit more complicated. In June, the number of passengers on premium seats worldwide grew an astounding 16.6% over the same month last year, according to the International Air Transport Association (IATA). More eye-popping are these numbers from the same report: Premium revenue for June was up 40% compared with June 2009, and traffic on economy seats was up almost 10%.

But a look beneath these numbers reveals a disturbing truth. Year-over-year numbers in 2010 show remarkable growth given the state of the industry in 2009; however, they were still far below 2008 figures. "We're coming up to a period when [comparisons] get tough," says William Swelbar, an economist in the Massachusetts Institute of Technology aeronautics and astronautics department. Compared with April 2008, the peak month before the bottom fell out of the global economy, the picture is decidedly less rosy. Premium traffic in June was 13% below the peak, while economy traffic was flat. Premium revenues in June were 25% off April 2008, and economy fares down 12%, says IATA chief economist Brian Pearce

Annualized, premium traffic this year grew by 9% and economy traffic by 6%, says Pearce. That is an unalloyed positive, but not the double-digit growth rates that year-over-year numbers suggest. Given that industry revenues and traffic correlate with macro economic indicators, is even this modest growth sustainable? Perhaps. As consumer confidence numbers fall, leisure travelers are more likely to put off trips, and economy traffic increasingly is driven by business travelers opting for cheaper fares. World trade and business confidence are continuing to grow, but not at as torrid a pace as earlier this year. Even if these trends continue, premium traffic could continue to grow by 6% into next year, says Pearce. The economic meltdown forced the industry to restructure and reduce capacity. This bodes well for continuing modest growth, says Swelbar. "My real concern is whether capacity discipline will continue to hold."

Indeed, although airlines are being cautious, Morgan Stanley analyst William Greene notes that capacity is growing everywhere. In the U.S., Southwest Airlines is showing "restraint," but Virgin America and JetBlue Airways are adding capacity "aggressively," says Swelbar. Emirates is one of a handful of airlines worldwide with a huge amount of capacity on order, says George Hamlin, president of Hamlin Transportation Consulting. "Once that capacity is installed, they have to do something with it." Next year remains risky for the airlines. The global economy could tank, or airlines could play the capacity game wrong, or both. "In short, nobody knows," says Hamlin.

WEEKLY MARKET PERFORMANCE Closing Prices as of August 18, 2010

Source of financial data: Standard & Poor’s and Capital IQ Inc. (a Division of Standard & Poor’s) U.S. dollars and cents. Forward P/E ratio uses S&P and Capital IQ forecasts of current fiscal year.

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