Economic News

LONDON (ShareCast) - The word "change" has been used a lot in the last few months; it was President Obama's mantra before the US elections, while the onset of the credit crises has propelled many to suggest the whole financial system needs to be overhauled. It is now being used by airliners as they fight for survival.

At the International Air Transport Association's (Iata) annual meeting in Kuala Lumpur this week, the global airline body projected airlines will lose $9bn this year, nearly double the estimate made in March.

Director General of Iata Giovanni Bisignani said the current situation is "the most difficult situation the industry has faced" adding that "change is critical" if it wishes to survive.

"Our industry is in survival mode. Whether this crisis is long or short, the world is changing. Even if we try to look beyond the crisis we must recognize that it will not be business as usual," said Bisignani.

"Our future depends on drastic resizing and reshaping by governments, partners and airlines to be even safer, greener and profitable," he added.

The airline industry is being hit hard from all angles. Last year, high oil prices hit the industry and then the global economic meltdown affected both commercial and consumer demand severely. And now, with oil prices on the rise again, both factors could combine to cause more turbulence.

Companies are trying to cope with the problems by slashing costs and drastically reorganizing themselves. British Airways (LSE: BAY.L - news) is focusing on cutting capacity and keeping a lid on costs after it tumbled to a pre-tax loss of £401m for the year, against a profit of £922m last year.

BA is looking to cut pay and jobs with chief executive Willie Walsh saying at the Iata gathering that such actions were needed as the industry is in a "fight for survival." Other cost-cutting measures have included not hiring consultants and stopping non-compulsory training programmes.

Its premium traffic, traditionally the most lucrative part of its business, has plummeted. Its non-premium traffic remained stable last year only because prices were dropped to attract customers.

Competition is making the situation tougher for airliners. To tempt passengers to continue flying, fares are being kept low and that is hitting the margins of all airliners.

Of course, those airliners that have historically had lower prices and a higher turnover of passengers are faring better.

Despite posting a loss for the half year, no frills airline easyJet predicts it will be profitable for the year because of current fuel prices and favourable exchange rates.

Heavy write-downs on its stake in rival Aer Lingus (LSE: AERL.L - news) sent Ryanair (Dublin: RY4.IR - news) deep into the red last year, while underlying profit fell 78%. Revenues though rose by 8%, as air fares fell 8% and traffic grew 15% to 58.5m.

Chief executive Michael O'Leary forecast a better outcome in 2009/10 with traffic seen up 15% to 67m and lower oil price hedges in place.

O'Leary notes that in the current climate, passengers are becoming more price sensitive and switching to low fare airliners: "Lower fares will help Ryanair to grow traffic, maintain high load factors and, despite a deep recession - gain traffic from high fare competitor"

Those that are struggling to survive are prime targets for takeovers. Aer Lingus, the airliner O'Leary was stalking, said losses this year will be "materially" worse than even its gloomiest forecast.

No doubt when the dust settles from this recession there will be fewer players in the industry as airlines will be forced to forge partnerships or consolidate to survive.

But those that survive the carnage will be in a very strong position, with fewer competitors, to benefit from the up turn.