C
chipmunn
Guest
ALPA International Economic and Financial Analysis Department
Airline Industry Economic Report - October 2002
US economic forecast
The consumer confidence level continues to drop—October’s level dropped to a 9 year low—indicating the consumer uncertainty about the future.
Economic growth should reaccelerate as shocks fade and an Iraqi war is past; however, the timing for any of this to happen is unknown.
The threat of double-dip recession is still present, with the possible effects that a war on Iraq could have on oil prices and other industries.
The Fed dropped the prime rate by ½ percent to the lowest rate in over 40 years—an indication that they are very concerned about the economy.
Airline industry
Customer behavior changes are affecting the industry. The passenger mix is weak as business passengers seek low fares. There has been an inability to raise fares/aggressive fare discounting. There is no pricing leverage, as all recent attempts to raise fares failed.
Poor industry performance is a factor. Revenue per available seat mile (RASM) has leveled off well below last year’s levels, and additional capacity and labor cuts continue.
There is an increased burden on airlines in the form of taxes, fees, and higher insurance premiums. Higher than Sin Taxes, airline travel is currently the highest taxed good or service available, and pending House legislation does not appear to address these taxes and fees. Instead, legislation appears focused on mail delivery, insurance, and the federal loan guarantee program. As an example, the tax on a $100 domestic airline ticket is nearly 45 percent, while a rail ticket is minimally taxed.
Current environment continues to challenge the industry US Airways’ bankruptcy may be followed by others. The current industry state, coupled with a potential war with Iraq, could result in one or two additional bankruptcies.
Rising fuel prices hover around $30 a barrel, putting more pressure on expenses. OPEC decided to leave production levels unchanged.
Airlines are looking to cost savings to combat losses, with various initiatives underway, including further capacity reductions and more furloughs, pricing changes and small jet growth.
Fuel prices are a significant uncontrollable cost for airlines
Price is projected at almost $3 billion dollars for third quarter 2002 (73.4 cents/ gallon).
A 1¢ change in fuel prices drains an additional $150+ million from the majors on an annualized basis.
Airline industry second quarter 2002 results
The airline industry lost $1.4 billion in the second quarter of 2002 with most airlines posting a second quarter loss.
Compared with the second quarter of 2001, traffic was down 10.5 percent and capacity was down 11 percent.
Revenues dropped 15 percent from last year. Passenger revenue decreased 15.7 percent.
Unit costs were down 2.5 percent.
Yield dropped 7.1 percent compared with 2000, due to industry/economic weakness, a loss of business travelers, and carriers refusing to match fare increases.
The operating margin for first quarter 2002 was -7.3 percent.
2002 second quarter revenues were at 1996 levels.
Third quarter 2002 results and long-term forecasts
The results for the third quarter 2002 earnings season include:
Revenues for major airlines declined 4.3 percent despite huge losses last year. The difference in revenue decline from third quarter 2000 is 18.8 percent.
Losses continue. Although net losses are expected to improve from the prior year, losses for network airlines remain at unsustainable levels.
Net Debt Increases.
Continued operating losses have been the largest contributor to growth in balance sheet burden.
There is pessimism regarding the prospect of recovery. The fourth and first quarters are historically the weakest earnings season.
Planning scenarios are gravitating toward increasingly severe economic and geopolitical circumstances.
Third quarter 2002 results for all majors include:
Net loss of $1.6 billion for major airlines coming in at analyst estimates, which were revised from a loss of $1.0 billion. Forecasts are continuously being revised downward as the industry struggles to recover. The major airlines had a net income of $734 million during third quarter 2000 and a net loss of $2 billion during third quarter 2001.
There is weak business traffic mix and tepid advanced booking trends, which continue to weigh on revenues.
Year-over-year RASM increased 13.8 percent to 9.9 cents per available seat mile.
Major airlines’ operating expenses declined 9.9 percent year-over-year.
Earnings per share estimates continue to be revised downward.
Comparisons to third quarter 2001 are expected to generate disappointing results.
Airline industry outlook
General industry forecasts are becoming less precise due to unprecedented, compounded events. There is uncertainty as to how the combination of the economy, terrorism, possible war and stock market plunge will affect the airline industry. The continuation and growing extremity of events will factor into recovery or erosion of industry income. There is presently a level of taxation and fees the industry has never before experienced, along with mandatory security/safety changes.
Analysts and managements are extremely hesitant in attempting to make long-term forecasts of any precise nature.
The long-term industry outlook, as forecasted by JP Morgan, UBS Warburg, and Merrill Lynch, in 2003 range from a loss of $4.0 to $2.5 billion, as compared to 2002’s forecasts of $6.9 to $7.0 billion. In 2004, analysts are forecasting profits as increasingly improbable with break-even likely as a best-case scenario and with airline industry profitability at the earliest. One company forecasts 2005 as being the first year with a decent return for the airlines.
Airline Industry Economic Report - October 2002
US economic forecast
The consumer confidence level continues to drop—October’s level dropped to a 9 year low—indicating the consumer uncertainty about the future.
Economic growth should reaccelerate as shocks fade and an Iraqi war is past; however, the timing for any of this to happen is unknown.
The threat of double-dip recession is still present, with the possible effects that a war on Iraq could have on oil prices and other industries.
The Fed dropped the prime rate by ½ percent to the lowest rate in over 40 years—an indication that they are very concerned about the economy.
Airline industry
Customer behavior changes are affecting the industry. The passenger mix is weak as business passengers seek low fares. There has been an inability to raise fares/aggressive fare discounting. There is no pricing leverage, as all recent attempts to raise fares failed.
Poor industry performance is a factor. Revenue per available seat mile (RASM) has leveled off well below last year’s levels, and additional capacity and labor cuts continue.
There is an increased burden on airlines in the form of taxes, fees, and higher insurance premiums. Higher than Sin Taxes, airline travel is currently the highest taxed good or service available, and pending House legislation does not appear to address these taxes and fees. Instead, legislation appears focused on mail delivery, insurance, and the federal loan guarantee program. As an example, the tax on a $100 domestic airline ticket is nearly 45 percent, while a rail ticket is minimally taxed.
Current environment continues to challenge the industry US Airways’ bankruptcy may be followed by others. The current industry state, coupled with a potential war with Iraq, could result in one or two additional bankruptcies.
Rising fuel prices hover around $30 a barrel, putting more pressure on expenses. OPEC decided to leave production levels unchanged.
Airlines are looking to cost savings to combat losses, with various initiatives underway, including further capacity reductions and more furloughs, pricing changes and small jet growth.
Fuel prices are a significant uncontrollable cost for airlines
Price is projected at almost $3 billion dollars for third quarter 2002 (73.4 cents/ gallon).
A 1¢ change in fuel prices drains an additional $150+ million from the majors on an annualized basis.
Airline industry second quarter 2002 results
The airline industry lost $1.4 billion in the second quarter of 2002 with most airlines posting a second quarter loss.
Compared with the second quarter of 2001, traffic was down 10.5 percent and capacity was down 11 percent.
Revenues dropped 15 percent from last year. Passenger revenue decreased 15.7 percent.
Unit costs were down 2.5 percent.
Yield dropped 7.1 percent compared with 2000, due to industry/economic weakness, a loss of business travelers, and carriers refusing to match fare increases.
The operating margin for first quarter 2002 was -7.3 percent.
2002 second quarter revenues were at 1996 levels.
Third quarter 2002 results and long-term forecasts
The results for the third quarter 2002 earnings season include:
Revenues for major airlines declined 4.3 percent despite huge losses last year. The difference in revenue decline from third quarter 2000 is 18.8 percent.
Losses continue. Although net losses are expected to improve from the prior year, losses for network airlines remain at unsustainable levels.
Net Debt Increases.
Continued operating losses have been the largest contributor to growth in balance sheet burden.
There is pessimism regarding the prospect of recovery. The fourth and first quarters are historically the weakest earnings season.
Planning scenarios are gravitating toward increasingly severe economic and geopolitical circumstances.
Third quarter 2002 results for all majors include:
Net loss of $1.6 billion for major airlines coming in at analyst estimates, which were revised from a loss of $1.0 billion. Forecasts are continuously being revised downward as the industry struggles to recover. The major airlines had a net income of $734 million during third quarter 2000 and a net loss of $2 billion during third quarter 2001.
There is weak business traffic mix and tepid advanced booking trends, which continue to weigh on revenues.
Year-over-year RASM increased 13.8 percent to 9.9 cents per available seat mile.
Major airlines’ operating expenses declined 9.9 percent year-over-year.
Earnings per share estimates continue to be revised downward.
Comparisons to third quarter 2001 are expected to generate disappointing results.
Airline industry outlook
General industry forecasts are becoming less precise due to unprecedented, compounded events. There is uncertainty as to how the combination of the economy, terrorism, possible war and stock market plunge will affect the airline industry. The continuation and growing extremity of events will factor into recovery or erosion of industry income. There is presently a level of taxation and fees the industry has never before experienced, along with mandatory security/safety changes.
Analysts and managements are extremely hesitant in attempting to make long-term forecasts of any precise nature.
The long-term industry outlook, as forecasted by JP Morgan, UBS Warburg, and Merrill Lynch, in 2003 range from a loss of $4.0 to $2.5 billion, as compared to 2002’s forecasts of $6.9 to $7.0 billion. In 2004, analysts are forecasting profits as increasingly improbable with break-even likely as a best-case scenario and with airline industry profitability at the earliest. One company forecasts 2005 as being the first year with a decent return for the airlines.
