A sharp reversal in the fortunes of worldwide airlines is being predicted now, most notably by IATA.  More than $2.5 Billion (with a “B”) in profit is now the target for the world’s airlines.  That sounds great to a lot of people and I think that number is soft.

Yes, load factors are up and business travel is up for now.  That’s great and I love that several US legacy airlines are projected to earn a profit for 2010.  However, I look to our east at Europe and its economic troubles and wonder if the recovery really is there. 

The aptly named PIGS of the European Union (Portugal, Italy, Greece and Spain) as well as a number of much smaller nations that are members of either the EU or NATO or both are all suffering badly.  Badly enough that the world’s financial markets are now betting against them and that means a lack of confidence.  A number of people are suddenly decrying the fall in the value of the Euro because that means European companies and countries suddenly have far less purchasing power relative to the dollar.  Short term, that’s a problem.  Long term, the Euro was vastly overvalued largely due to a lack of transparency on the part of EU member nations and how their central banks were operating as well as regulating their financial industries.

Sadly, the EU can’t depend on very much assistance from the United States.  Oh, we will try to help quite a bit but we went all in at the table many months ago and there just isn’t much resources left on our part.  The thing is, we at least acknowledged our exposure, however painful and bitter that was, up front and went to work on getting things fixed.  At this point, the financial markets know there really aren’t any bad chickens that could come home to roost in our farm.  That isn’t the case in Europe.

Europe has the potential to be a drag on our economy for another 2 years and a bigger influence on Southeast Asian countries as well as China and India.  Suddenly, I’m talking about North America, Europe, and half of Asia.  That’s a pretty big marketplace and I think that to declare an airline recovery all but certain is a bit premature. 

I think US airlines, even North American airlines, will do reasonably well domestically and regionally.  I think the lucrative and profitable international arenas are soft at best and it would be wise to continue to play this as conservatively as possible.  

We still don’t have a clear picture of just how much jeopardy Europe is in.  We don’t even have a clear picture of how much flexibility they have to deal with a moderate case of the doldrums much less a worst case scenario.  What’s more, Europe reacts more slowly than the US does because it requires the coordination of tens of governments vs one.   And some of the larger EU economies are feeling resentful of being obligated to “help out” their smaller, less well managed brothers.  This is a region that remains fractured by national interests.

I ferverently hope things do recover in this industry.  I don’t think the outlook is nearly as rosy as it appears.  I believe there is 2 to 3 years of real pain to be felt in Europe and I believe a lot of that pain is going to be in the form of a further sharp decline in the value of the Euro.  That means less money to spend on traveling to other places, less money to purchase capital equipment and greatly reduced budgets in the European governments for defense/aerospace purchases.  

It would be unsurprising to me to see the Euro valued at $0.90 to $1.00 by early next year.  The one piece of good news is that this should keep oil prices relatively low (and by relative, I mean relative to 2 years ago.)  That will help airlines on the cost side some but it isn’t a source of profit.  Profit comes from people traveling on your aircraft in strong numbers day in and day out.

Filed under: Airline News by ajax