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"A better 2007 ahead for airlines, but trouble looms after"

Wednesday, December 13, 2006

A better 2007 ahead for airlines, but trouble looms after
By Susanna Ray
Bloomberg News

GENEVA - The global airline business will improve more than initially
forecast this year and next as fuel prices fall and Delta Air Lines and
Northwest Airlines complete their reorganizations, an industry association
predicted Tuesday.

But the improvement in profit margins will stall after 2007 as the world
economy slows, according to the International Air Transport Association,
which represents 260 carriers. The group now forecasts that the industry
will lose $500 million in 2006, down from a $3.2 billion loss in 2005,
followed by net income of $2.5 billion next year, the first profit in six
years for the $450 billion industry.

The association had forecast in September that the industry would lose $1.7
billion. It had predicted at the time that airlines would post 2007 profit
of about $1.9 billion.

The new forecast comes after jet-fuel prices fell $20 from a peak of $93 a
barrel before the last forecast in August, Brian Pearce, the IATA's chief
economist, said during a news conference at the group's Geneva headquarters.
The decline in oil prices is likely to moderate, he said, and IATA is
already seeing signs of slower sales growth because of a weakening economy.

"Our revenue cycle has peaked," said Giovanni Bisignani, the IATA director
general. Industry revenue rose 8 percent this year, and a 4.5 percent gain
is expected in 2007.

Airlines have racked up losses of $41 billion since the Sept. 11, 2001,
terror attacks, which initially devastated air travel. Demand was also hurt
by the war in Iraq, the outbreak of severe acute respiratory syndrome and
surging oil prices.

The U.S. industry has been particularly hard-hit, with numerous carriers
struggling to avoid bankruptcy. Delta filed for protection from creditors in
September 2005, the same month Northwest filed for Chapter 11 protection.
Both carriers aim to emerge from bankruptcy next year.

"Without the $6 billion restructuring costs in the U.S., 2006 would have
been profitable," Bisignani said. Lower reorganization spending in the
United States next year will drive the industry's earnings improvement,
Pearce said. The net benefit from U.S. airlines' restructuring will probably
be limited to next year, he said.

An increase in passenger numbers has helped to make up for extra fuel costs
this year. International airline passenger traffic rose 5.8 percent in the
first 10 months of 2006.

"We now think the industry has almost broken even at the net level this
year," Pearce said. The industry should be focusing on keeping the momentum
past 2007, he added, with continuing improvement contingent on the ability
of airlines to cut costs and win reductions in fees to counter high oil
prices and any weakness in sales.

In Europe, where airlines have cut costs and protected earnings with fuel
surcharges on tickets and advance contracts for oil, the industry will post
a $1.5 billion profit in 2007, the association said. Asian carriers will
record a $1.2 billion profit, and U.S. airlines will post net income of $200
million, the association predicted, while the African industry will still be
unprofitable, with a $500 million loss.

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