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Investing in This Industry’s Downside is A No-Brainer
This analysis is from Martin Denholm, Senior Editor, Investment U
Thursday, January 28, 2010
Just a few days after the collapse into bankruptcy of Japan Airlines, the third-largest carrier in Asia, grim figures from the International Air Transport Association (IATA) shed some light on the reasons behind the airline’s descent.
In short, it was the worst year in post-war history for the airline industry.
With several major developed economies still experiencing anemic growth and unemployment rising, airline passenger numbers took a dive in 2009, falling by 3.5%. And in a telling sign of the global economic woes, freight volume slumped by 10.1%.
A closer look at the figures shows the following…
- North American airlines’ passenger numbers dropped by 5.6% in 2009.
- European carriers saw a 5% year-over-year drop.
- Airlines in the Asia-Pacific region endured a 5.6% fall in traffic.
- Africa-based airlines’ numbers endured the worst drop, though, with traffic dropping by 6.8%.
The Airlines’ Vicious Cycle… And a Tough 2010 Ahead
The news comes just six weeks after the IATA said airlines collectively lost $11 billion in 2009. And the group projects a further $5.6 billion loss this year.
While the extent of the losses is attention-grabbing, the news itself is hardly surprising. Like retailers, airlines have been forced into a price war in order to attract cash-strapped customers. But the effort to drum up sales can prove to be a vicious cycle. The discounted fares haven’t been enough to produce decent passenger numbers – and that price-cutting has only served to erode airlines’ profit margins.
With 2010 just one month old, director-general and CEO of IATA, Giovanni Bisignani, says that while “the worst is behind us,” the airline industry still faces “enormous challenges” this year and beyond. Not the least of them is the renewed security crackdown, following the bomb attempt on a Delta flight from Amsterdam to Detroit at Christmas.
Amid the Gloom… Two Airline Bright Spots
While the bankruptcy of Japan Airlines is significant, it’s merely served to illustrate that the airline industry may actually need fewer companies battling for what has become an increasingly small pie, or at least more consolidation (similar to Northwest and Delta).
That said, certain regions are faring better – and it’s no surprise that Latin America is one that experienced growth in passenger numbers last year – albeit just 0.3%. However, the highlight comes from the Middle East, which enjoyed a solid 11.3% jump in traffic, with airlines like Emirates earning praise and eating into traffic at well-established Western airlines.
Investing in this industry’s downside seems like a no-brainer, given Bisignani’s assertion that revenue growth will be painfully slow – and “profitability will be even slower to recover.”
Best regards,
Martin Denholm
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