Airlines Plan Wide-Body Splurge as Profit Bounce Fires Ambitions
Airline executives are set to spend more on orders for the latest wide-body planes from Airbus SAS and Boeing Co. (BA) as consolidation and cost cuts give them more reason for optimism for a rebound in earnings this year.
Deutsche Lufthansa AG (LHA), Japan Airlines Co. and South African Airways are among carriers weighing deals for models seating from 250 to 525 people, executives said at the International Air Transport Association annual meeting in Cape Town. Singapore Airlines Ltd. (SIA) last week placed a $17 billion order for 30 Airbus A350s and the same number of Boeing 787s.
Interest is surging as IATA lifts its 2013 forecast for industry-wide profit by 20 percent to $12.7 billion, citing the fruits of restructuring. Willie Walsh, chief executive officer of British Airways owner IAG SA (IAG), which bought 36 A350s and 787s in April, said the aviation industry has been “transformed” and will be “very, very different” in the future.
“Anybody who looks historically at what has happened to try to forecast what’s going to happen in the future should forget about it and start with a blank sheet of paper,” Walsh said. “I genuinely believe we’re an industry that for the first time will start exceeding our cost of capital.”
Airbus is looking at boosting production for its new A350, due to fly in coming weeks, as strong sales take up manufacturing slots, forcing new customers to wait longer. A decision on whether to invest in higher output should be made this year, sales chief John Leahy said in an interview.
The Toulouse, France-based company had 616 firm contracts for the long-range jet through April, with several other airlines saying they are committed to buying.
Japan Airlines (9201) Co. is in advanced talks with Boeing to replace as many as 45 777s with an updated version known as the 777X or with the 787 Dreamliner, Shigeyuki Kamei, vice president for international relations and alliances, said.
Discussions are also underway with Airbus about an alternative purchase for the A350, its chairman, Masaru Onishi, said in a briefing in Cape Town, where IATA is meeting this year.
Lufthansa plans to place an order for about 50 long-haul jets from Airbus or Boeing this year after already committing to buying two extra A380 super-jumbos from the European planemaker and six 777s from its U.S. counterpart, Europe’s second-biggest airline said yesterday at the gathering.
“These orders are big financial commitments for the long-term, and a sign of confidence that we will maintain our leadership role,” CEO Christoph Franz said at a press briefing.
South African, the continent’s No. 1 airline, said it plans to buy as many as 35 wide-bodies within 90 days to replace aging Airbus A340 models. The company will choose between the A350 and 787 Dreamliner, with deliveries starting in 2017, Deputy Chief Executive Officer Nico Bezuidenhout said in an interview.
Cathay Pacific Airways Ltd. (293), Asia’s biggest international carrier, is looking at whether to buy four-engined A380s or Boeing 747-8s -- the two biggest passenger planes -- and is also “very happy” with the range of twin-jet wide-bodies on offer, CEO John Slosar said at the IATA event.
Already a major 777 operator and A350 customer, the Hong Kong-based company is exploring the feasibility of operating planned models such as the 787-10X and updated 777X.
“The industry’s more optimistic now because capacity has been kept well in check relative to last time,” meaning supply is better aligned with demand, said Tim Campbell, president of Mountain Vista Consulting LLC in St. Paul, Minnesota.
The annual net income forecast by IATA would represent a 67 percent gain on last year’s $7.6 billion, with airlines set to carry more than 3 billion people for the first time.
The surge in earnings is in part a result of capacity restraint which should help lift the average load factor, or seat occupancy, to a record 80.3 percent this year, IATA CEO Tony Tyler said yesterday.
An acceleration of fleet expansion coming on top of orders already at record levels could imperil margins that remain “razor thin” at a projected 1.8 percent, Tyler said, adding that given shocks spanning volcanic eruptions to viral outbreaks, crisis can seem to be the industry’s “natural condition.”
Ethiopian Airlines Enterprise CEO Tewolde Gebre Mariam said he’s concerned about the amount of capacity likely to pour into the market, and that carriers may be being “overly optimistic,” particularly in light of likely fuel-price trends. Fuel remains most airlines’ single biggest expense, often exceeding 40 percent of all costs.
“It’s a cyclical industry and the level of revenue growth is coming up,” he said in a briefing at the IATA event. “But the big barrier is fuel. When economic growth kicks then fuel goes up, and the industry will start suffering.”
With airlines filling more seats on fewer flights, aviation fuel has fallen to the lowest level for this time of year since 2010. Jet fuel prices have plunged 23 percent in Europe this year as demand declined, according to data compiled by Bloomberg, and the International Energy Agency forecasts that consumption of the fuel will stay sluggish through 2013.
Delta Air Lines (DAL) Chief Richard Anderson said he’s less concerned about oil-price trends, with a general decrease in demand coupled with the U.S. moving toward self sufficiency likely to ease pressure on margins.
“The fuel picture looks quite good for this industry over the long run,” he told the meeting.
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