The Unrelenting Quest for Sustained Profitability
By ATA Vice President and Chief Economist John Heimlich
Just one year ago, the following commentary was all too prevalent: “It’s hard to imagine a scenario in 2009 in which the airlines lose money. In fact, they are on a path toward record profitability.” Upon hearing this consensus of unfettered optimism, I could not help but ask myself if the commentators truly appreciated the industry’s susceptibility to sudden and pronounced changes in the operating environment.
With steep drops in fuel prices, analysts and pundits reasoned that revenue would have to decline at a pace exceeding that witnessed in the aftermath of 9/11 to preclude the prospect of black ink. So what transpired? The low-probability scenario – the one involving the worst global recession since the 1930s, including U.S. unemployment surpassing 10 percent – left the airlines scrambling to raise additional capital in the late summer and fall of 2009. And once the final tally is in for full-year 2009, U.S. airlines will have amassed some $60 billion in net losses and shed 160,000 jobs over the first nine years of this decade. With 10 percent of Americans unemployed, it is worth pausing to consider the broader implications of financial hardship in aviation, especially when federal studies show that every $1 million of aviation economic activity generates more than 24 jobs throughout the United States.
Of course, most people are painfully aware that the economic pie, as measured by gross domestic product (GDP), shrank in 2009 for just about every known and reported sector. What hurt the airlines especially hard is a tale of two additional disturbing trends. First, the industry’s slice of the pie got smaller. From 1991 to 2000, domestic airline passenger revenue averaged 0.728 percent of U.S. GDP. In fact, going all the way back to 1990, that ratio never had never fallen below 0.7 percent until 2001. By the 12-month period October 2008 through September 2009, however, that relationship had waned to a mere 0.475 percent. The difference translates to a staggering $36 billion in revenue that has seemingly vanished on an annual basis. Second, the drop in economic activity and resultant energy demand failed to bring about a commensurate decline in fuel prices. Despite the worst global recession since the 1930s and the largest year-over-year drop in world petroleum consumption since 1981, crude oil prices in 2009 have averaged three times the 1991-2000 average.
In part the falling-demand phenomenon is driven by the redeployment of disposable income to cover higher energy costs besetting consumers and businesses. But it also is a troubling reflection of the degradation of air travel’s core value proposition – the need for speed. Airplanes fly faster today than they did decades ago, yet trips are taking longer than ever. In fact, all components of the journey – to and from the airport, through the airport, and from airport to airport – regrettably take longer, on average, and are less predictable than in years gone by. Most of the passenger revenue-to-GDP relationship can be explained by a series of commercial and regulatory developments that occurred from in the 2001-2002 timeframe. And while the airlines recovered some lost ground on this basis in each of the years 2003 through 2006, the situation has reversed in 2007, 2008 and 2009.
With the recession seeming to abate, is there cause for optimism? Certainly – it is hard to imagine the fundamentals getting much worse than they have been over the past two years. But it is critical to stay focused on two undeniable truths as we enter 2010: 1) revenues and costs cannot be viewed in isolation, and a recovery in economic conditions that is accompanied by a disproportionate increase in fuel prices could be a daunting if not deadly mismatch; 2) the industry has a long way to go, and while there are numerous reasons that 2010 might indeed bring better times for the airlines, it is important to remember that “better than 2009 is not saying a whole lot” in the grand scheme.
Let’s face it – this is a global business that needs to compete on a global stage, facilitating U.S. competitiveness and job creation in a way few other industries can. As noted in “Aviation: The Real World Wide Web,” published in June 2009 by Oxford Economics, aviation performs its critical enabling function best when left unimpeded by harmful government intervention. On Nov. 16, 2009, Bank of America analyst Michael Linenberg observed: “European airlines are leading the charge in pursuit of a more stable airline operating model by leveraging the strengths of a vast and robust European network.” Meanwhile, he continued, “…aviation leaders in the U.S. try to understand what ails the U.S. industry as the DOT and DOJ argue philosophical differences regarding alliances, joint ventures and the like.”
With so much discussion of public investment and job creation in the halls of Congress and at the American dinner table, would it not be wiser to focus a small portion of our governmental resources on projects that will yield handsome returns – shorter travel and shipping times, lower public and private sector operating costs, reduced energy consumption, noise and emissions – in perpetuity? That’s right, accelerating investments in 2010 in an information-centric, satellite-based, digitally enabled “NextGen” air traffic management system could lay the foundation for enhanced U.S. global competitiveness for decades to come. So, too, could legislative and regulatory reforms of energy futures trading, creating a more stable platform for investments in aircraft and other equipment, as well as alternative energy.
Unlike a year ago, today few analysts or industry experts are projecting record profitability for U.S. airlines in 2010. It has become even more evident to me, over the past several years, that in our business shocks are the norm, not the exception, and sudden changes in the trajectory of revenues and costs are to be expected. Unfortunately, so, too, in aviation are legislative and regulatory impediments to financial stability and job security, like new taxes or costs associated with proposed climate legislation. The best news is that many airlines are reporting a steady upward trend in bookings going into the new year, including premium seating for business customers. Indeed, that is cause for optimism.
Let us not forget the lessons of the past nine years as we enter the last year of the decade with as much hope, resolve and resilience as this industry has continued to show year after year in its unrelenting quest for sustained profitability. It is perhaps clearer than ever that hundreds of thousands of jobs, from coast to coast, are riding on it.