Price pressures ground airline sector recovery hopes

Germany’s Lufthansa and the airline industry’s representative body provided a gloomy outlook for the sector as carriers around the world struggled to make a profit amid a fierce battle for business.
“Initial signs of a stabilisation in volumes are far away from making up for the enormous and unrelenting pressure stemming from the massive fall in price levels,” the German flagship carrier said on yesterday.
Industry body IATA echoed Lufthansa’s warning, saying it was still too early to talk about a recovery. IATA has said it sees the world’s airlines losing $11 billion this year as consumers tightened their purse strings and companies cut travel budgets.
“The worst may be over in terms of the fall in demand, but yields continue to be a disaster and costs are rising,” IATA said.
Airlines around the world have been crippled by a toxic mixture of reduced spending on travel, a drop in global trade and rising oil prices. To cut their bloated cost bases, many have grounded planes and cancelled or deferred plane orders.
Lufthansa has rescheduled some aircraft deliveries to save €1 billion ($1.5 billion) over the next three years. Plane makers Boeing and Airbus are headed for their worst annual order tally in at least 15 years.
Demand has suffered especially this year in the highly profitable business class segment as companies ask staff to book cheaper seats.
Finnish national carrier Finnair earlier said it saw third-quarter sales fall sharply due to declining demand for business travel, adding it would continue to make losses during the rest of the year.
Air cargo is in even worse shape than passenger demand as global trade remains at low levels, IATA said. Lufthansa, which operates Europe’s biggest air cargo fleet, said revenue in the sector was still falling steeply due to declining prices.
Cash is king
“What we have seen so far does not indicate at all that the tough times for the airline industry will be over soon. The environment will remain challenging for some time and we still do not expect significant positive news flow in the short term,” said MM Warburg analyst Michael Bahlmann.
Japan Airlines, Asia’s largest airline by revenue, is asking the government for a “huge” bailout as it heads for its fourth annual loss in five years, weighed down by $15 billion in debt and crippling pension costs
Stronger airlines that still have cash to spend have been able to take advantage of the crisis’s severity by scooping up smaller rivals that got into financial trouble and sought help from investors.
British Airways, American Airlines and Qantas Airways, as well as a rival group led by Delta, held separate talks to invest in JAL, but reports earlier this month said tie-up talks may have been put on hold.
BA has also been in merger talks with Spain’s Iberia since June 2008. Last week, Iberia surprised the market by presenting plans for a new airline that showed it was bracing for a tough future, with or without a partner.
Lufthansa last year agreed to a raft of acquisitions, including Austrian Airlines and bmi, as it battles rivals Air France-KLM and British Airways for pole position in the European aviation sector.
British Airways is scheduled to publish quarterly results on Nov. 6 and Air France on Nov. 18.