Airlines Gear Up For ‘Golden Age’ Analyst Predicts Good Times For Carriers, Aircraft Makers

Airlines and aircraft makers are heading for a “Golden Age” in which they can expect consistently higher profits as airlines plan fleets more intelligently, an analyst said.

“We believe this could be the start of a golden age for both sides,” said Chris Tarry, an aviation analyst at Kleinwort Benson, as both industries undergo consolidation and focus increasingly on efficiency.

Tarry was speaking to about 500 industry executives and analysts at a two-day conference on aircraft finance last week.

He said he expects airline traffic to increase an average of 5 percent a year globally for the next 20 years, with growth in individual markets outpacing growth in gross domestic product by a factor of 1.5 to two. That should produce a need for some 11,000 new planes over the 20 years, he said.

The golden age, the analyst said, will be brought about by a “fundamental” change in strategy. Airlines, which discovered a new respect for cost-cutting after suffering massive losses of the early 1990s, will continue the drive to cut costs. They won’t go on plane-ordering binges as they did in the past every time it appears that traffic is picking up, he said.

In addition, the advent of total deregulation in Europe and other competitive pressures will lead toward the development of “virtual airlines” - carriers that perform only the core services they need to and contract out everything else, saving overhead costs.

The world’s airlines lost a total of $13 billion between 1990 and 1994, according to the International Air Transport Association.

Tarry predicted that economic cycles in the industry will level out and the traditional pattern of seven good years followed by three bad years will fade.

“We’ll see peaks (in profits) with less downside,” Tarry said. “I don’t see seven up, three down. And airlines won’t fall off the profitability cliff in 2001” as they did in 1990.

He said airplane manufacturers would see better times too, as they have cut production times, allowing them to respond more quickly to airline needs for planes.

“With reduced cycle times and a focus on productivity, I think (production) is something that will come under control,” he said. “The last cycle was a painful and important learning experience.”

In the late 1980s, airlines all rushed to place huge orders with aircraft makers, fearful that as airline traffic grew, rival carriers would get in line before them to have new planes built.

When an economic slowdown came in 1990 and airline travel slowed, airlines then rushed just as quickly to cancel orders, leaving aircraft makers overstaffed and ill-prepared for the downturn. Massive layoffs ensued, with Boeing axing some 20,000 employees.

Tarry predicted that aircraft prices would remain subject to severe pressure, and said that even with McDonnell Douglas being swallowed up by Boeing Co., two manufacturers was enough to keep price competition strong.

Airlines have so much power over the manufacturers that they can “write a quite attractive number down on a piece of paper” and Boeing and Airbus, unwilling to let their rival beat them to it, go along.

Tarry echoed the opinion of others at the conference, including KLM’s corporate controller, Hans Bruggink, that the aviation industry will evolve toward the creation of just five or six large, global carriers formed through alliances and mergers.

Such companies are already in the process of being formed, such as alliances between KLM and Northwest Airlines, Lufthansa AG and UAL Corp.’s United Airlines, and British Airways Plc and Qantas.

KLM, for one, generates an additional $150 million in revenue yearly through its tie-up with Northwest.

If BA and Qantas were ever able to operate their 747s as a single fleet, Tarry said that would reduce the number of aircraft the two airlines needed by 20, saving financing costs on $3 billion worth of assets. “So there are big incentives to improve asset productivity,” he said.

He noted that if a proposed alliance between BA and AMR Corp.’s American Airlines is allowed, it would add $225 million to BA’s income statement a year. American’s income would increase slightly less than half that much.

He said that Lufthansa’s commercial partnership with United, which added $143 million to Lufthansa’s income statement last year, would add about 30 percent more this year.

Tarry said he had just one caveat on the golden age prediction. “This will be a golden age for survivors on both sides,” he said.