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Air Transport Association chief economist John Heimlich this week will issue his 2008 industry forecast in which he predicts a third consecutive yearly profit for the U.S. commercial aviation sector. Also an ATA vice president, Heimlich spoke with Management.travelon a wide range of topics, including airline supply and demand, the cost of fuel, potential for industry consolidation and other expectations for 2008. An excerpt follows:
What were the most significant developments in 2007 for the U.S. airline industry?
The most significant development was the back-to-back profit. We don't have final numbers yet, but we know we'll post a profit, and we forecast it to be $5 billion--including the cargo carriers. That would make 2006-2007 the first back-to-back net profit for the industry since 1999-2000. The carriers still have a long way to go. Only one of the 10 [largest] passenger carriers enjoys an investment grade credit rating from Standard & Poor's, so we need more years to get back to where we were. But this helps cut into the $35 billion deficit created by the previous five years (2001-2005). The huge takeaway from this year is the industry's ability to make money at the crude oil prices we are seeing, which will probably end up averaging more than $70 per barrel.
What are the overall demand trends for 2008 and how will corporate demand, in particular, impact the airlines?
In 2008, we'll see a continued robustness in the international markets. If you look at world gross domestic product, it is growing at about twice the rate of U.S. GDP, and it is no coincidence that [international] revenue per seat is outperforming the domestic market. Thanks to very proactive adjustments to supply this year, the carriers will be able to see revenue growth domestically in 2008. What we are going to have, then, is solid revenue growth offset by a substantial increase in fuel expense and a modest increase in non-fuel expense. In the end, we'll probably erode slightly from our '07 profits. Corporations are doing more business internationally, which is travel-intensive. My impression, and what I have read from various surveys, is that they are not cutting back commensurately with any sort of economic setbacks, or the housing crisis or whatnot. In other words, what may be affecting the overall economy will not translate at the same pace, and will not materialize as reduced demand for air travel at the same pace in '08. We may lose some volume, but we'll end up with a better mix of traffic. I am not as concerned as other sectors may be for degradation in '08.
On the cost side, how much more pain will airlines feel in 2008, and what level of efficiency gains can the industry still realize?
If not for the higher fuel expense in '08, they could have actually increased their profit from '07. Instead, we are likely to see a smaller profit. Let's suppose we finish this year at $71 a barrel, a full-year average. My working assumption for '08 is $80 a barrel--and I am lower than some forecasters, higher than a few. We do about 475 million barrels a year, so that $9-a-barrel increment over the course of the year would add about $4.3 billion to our fuel expense. The good news is we'll offset that with some revenue growth, and we'll also trim some capacity and won't consume quite as much. We made some very steep efficiency gains from 2000 to 2005. I'd be hard-pressed to find a year in which we did not improve fuel efficiency. The question is, to what degree? Part of it is the airplanes, and there will be continuation of airplane retirements [leading to younger, more efficient fleets]. When I said we are cutting capacity due to higher fuel prices, that will result in a greater mix of more fuel-efficient flying because, typically when you pull down capacity, you pull down the least efficient aircraft first. But don't forget that the environment in which the aircraft operates is also important to its fuel-efficiency performance. We, of course, had a lot of problems this year with air traffic control congestion. Just like a car that gets better [fuel] ratings on a highway than in a city where you stop and start, that is also true for an airplane. I would like to think that due to some of our adjustments and due to some things the federal government is doing in the New York airspace that we'll end up seeing a little less wasted fuel burn due to congestion. All those will give us--maybe not gains comparable to '00-'05--gains comparable to what we saw '05-'06 and '06-'07.
As an aside on fuel, in addition to fleet and other operational efficiencies, what approach does ATA favor to combat climate change?
Essentially, we favor voluntary targets rather than taxes or cap-and-trade systems. We already have a built-in incentive, as you are witnessing, to minimize our fuel consumption, and the vast majority of our emissions are fuel-related. We just do not see additional cost burdens benefiting us, the traveler or shipper. We will continue to work to improve our efficiency and we think we have a better track record than most industries out there, so we'll keep doing it. We also continue to participate in industry forums to see if we can use alternative fuels in commercial aviation. It is not just about the airplane itself--there is the fuel, the infrastructure, the way you operate the airplanes. We are looking more at continuous descent approaches, lighter materials for beverage carts ... it goes on and on.
A big question for 2008 is whether the industry experiences any meaningful consolidation. What factors will be in play to either encourage or dissuade airlines from pursuing mergers and acquisitions?
They will be monitoring closely what happens overseas, where you have European flag carriers or Asian flag carriers that compete with the U.S. airlines for what is an expanding source of revenue for U.S. airlines: the international market. If you start to see consolidation waves abroad--even in Canada--that starts to make you think, "Well, I need to make sure I remain competitive on the world stage." The other factor will be if fuel prices remain high, and perhaps if the revenue environment were to turn south ... then, the way I look at it is there is less revenue to go around and split up amongst all these carriers, to cover their high fuel costs. That is another pro-consolidation force. Whether they consider the change in political winds, from one administration to another, that is another question mark.
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