Taking A Closer Look At Financial Reality For Airlines

<B> Taking A Closer Look At Financial Reality For Airlines</B>

By Jay Campbell

Few travel managers have not, at some point, heard airlines talk about how hard it is to make money in their industry.

The standard lines tend to be "Margins for the airline industry are razor thin, even in the best of times," and "Airlines lost $13 billion in the early '90s, more money than they have ever made."

Taking aside a point that even airlines like to make--that only over the last couple years are they even running themselves like a real business--these claims are a bit exaggerated. Fortunately for both airlines and their corporate customers, the factors behind these trends are fading, particularly bad management.

Between 1987 and 1997, the Air Transport Association reported wild swings in airline industry success. Net profit margin went from 2.6 in '88, to -3.1 in '92 and up again to 4.7 in 1997, a ten-year high. That 4.7 is approaching the rate of other businesses, according to ATA. "Airlines through the years have earned a net profit between 1 and 2 percent, compared with an average of 5 percent for U.S. industry as a whole," the association said. In the best of times, then, the airlines are about average.

Paine Webber airline analyst Sam Buttrick believes a better measure of airline industry performance, as compared with other industries, is return on equity. By that measure, he said, airlines now rank at about the 50 percent mark--hardly "thin." However, Buttrick said, in the early '90s, even that indicator was low.

Clifford Winston, senior fellow of economic studies at the Brookings Institute in Washington, reacted to the "razor thin margins" statement as travel managers do: "I don't care that their margins are low compared to other industries. That they even say that is ridiculous. What they're really saying is that a slight change in load factor, or fuel prices, can have an impact on profitability--that I can use," he said. "The airlines lost a lot of money during the early '90s, and by any measure, they're making a lot now."

Precisely how much did they lose in the early '90s? The commonly-used figure of $13 billion appears to have established its place in general discourse, thanks in part to the ATA, but Winston's book, "The Evolution of the Airline Industry," points out that the number is misleading.

For example, the figure includes losses due to a 1992 change in accounting practices, Federal Accounting Standard 106, that affected all industries. The change accounted for $2.2 billion in losses for airlines. Also, staggering losses reported by only a few carriers, Continental, Eastern, Pan Am and TWA, amounted to $5.6 billion. Further, the surviving and non-bankrupt airlines, namely the big three of American, Delta and United, incurred hundreds of millions of dollars in cost increases when they bought the remains of other carriers' international networks.