Airline woes good news for passengers

MICHAEL SMITH
Last updated 08:36 04/06/2014

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The commentary coming out of the global aviation industry's annual meeting makes for grim reading and makes you wonder why anyone invests in airlines at all. Warren Buffett has known this for a while and his advice is to avoid the sector.

Although the global aviation industry is heading for a record US$18 billion (NZ$21.3b) collective profit this year, margins are so thin that there is no real resilience in an industry prone to external shocks.

That forecast has been watered down from US$19.7b originally, before oil prices rose after this year's conflict in Ukraine.

The forecasts coming out of the International Air Transport Association (IATA) this week put Qantas Airways' grim performance into some perspective.

IATA chief Tony Tyler warns the industry is vulnerable to shocks such as a jump in fuel prices, natural disasters such as volcanic ash clouds or an economic blip. Record fuel prices are hurting but competition is the big challenge, particularly for carriers such as Qantas, despite the world's insatiable demand for air travel.

Airlines have survived through consolidation such as joint ventures and alliances. In the US, three major airlines have merged to form the American Airlines Group.

IATA chief economist Brian Pearce says it's a miracle the industry makes money at all, pointing to a return on invested capital averages of 5.4 per cent, which are around 2 percentage points below the cost of capital.

It's all good news for consumers, something that has been highlighted by the capacity war on Australian domestic soil between Qantas and Virgin.

There are now signs that is easing, but the performance of Qantas's international operations shows no sign of recovering soon.

Virgin Australia has less exposure to the international market, but it has its own internal issues to deal with as it prepares to welcome in new board members from stakeholding airlines Etihad, Air New Zealand and Singapore Airlines.

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- AFR

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