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Industry Outlook -- SERVICES


It looks like another year that transportation executives will love and customers will loathe: Planes, trains, and trucks will be packed, and fares and freight rates will rise.

The airline industry could top last year's record $4.5 billion in profits, making it the first time the industry has racked up four years of record profits in a row. Strong demand and more sophisticated management of prices are pushing up revenues, while the carriers are likely to offset rising labor costs with productivity gains, lower fuel bills, and reduced distribution costs thanks to electronic ticketing. "The resurgence is not over. There's still a lot more to come," crows CEO Gerald Greenwald of United Airlines Inc.

Analyst Brian D. Harris of Lehman Brothers Inc. figures the 11 airlines he tracks will post net 1998 profits of $4.7 billion on revenues of $89.2 billion--both up nearly 5%. Operating margins will be virtually flat at 9.5%.

Driving the gains is the industry's disciplined restraint from overexpanding fleets in response to strong demand. The result: rising ticket prices and full planes, with load factors at record levels. Industry executives expect capacity this year to grow about 3.5%, still in line with demand. That is likely to mean an estimated 6% increase in business fares, following an 18% jump in 1997, says Eric J. Altschul, vice-president for consulting services at American Express Co.

SURPRISES. In the turbulent airline business, you can always count on surprises. Some analysts still predict a wave of U.S. mergers, possibly starting this year. Indeed, Continental Airlines Inc. and Northwest Airlines Corp. recently held talks to create a worldwide alliance, though not an outright merger.

For the railroads, especially battered Union Pacific Corp., last year's results should be easy to beat. After its 1996 merger with Southern Pacific Rail Corp., Union Pacific faced a disastrous service meltdown starting last summer. Federal regulators even stepped in to help clean up the mess. Burlington Northern Santa Fe Corp., which had merger problems of its own, gained some business at UP's expense, but a shortage of locomotives will crimp its gains until the second half. After the merger woes in the West, CSX Corp. and Norfolk Southern Corp. face stiffer federal scrutiny of their proposed split-up of Conrail Inc. Excluding the breakup, analyst James J. Valentine of Salomon Smith Barney estimates that the seven largest railroads will post net income of $4.8 billion, up 20%, on revenues of $34.7 billion, a 5% gain.

While the railroads got sidetracked, trucking companies picked up some of the slack. But a severe driver shortage capped the gains for some. Indeed, truckload carriers are likely to increase driver salaries this year to attract new people and lift the lid on revenues. So truckers expect to steer around the potholes to reap solid gains.By Wendy Zellner in DallasReturn to top


Prognosis 1998


-- Growth in airline capacity should keep pace with demand

-- After a rocky start, Western railroads will reap benefits of mergers

-- Lower fuel costs should help all sectors


-- Rising labor costs will pressure airlines and trucking companies

-- Locomotive shortage will hinder some railroads early in the year

-- Higher airfares may trigger business backlashReturn to top

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