Global airline equities are cleared for take-off

THE global airline industry is set to take off this year, provided the economic recovery holds up, according to the International Air Transport Association (IATA), an association of 230 airlines. IATA has revised its 2010 profit forecast for the industry up to $2.5bn, having formerly predicted a $2.8bn loss. It says that low oil prices, a higher-than-expected recovery in passenger numbers and rising demand for cargo transport by businesses re-stocking after the recession will drive up revenues by 2.3 per cent.

The global recovery in air travel has mostly been led by non-Japanese Asian and North American carriers. Flights within Asia, in particular, are on the up, benefiting leading regional airlines such as Cathay Pacific and Singapore Airlines. Meanwhile, the industry as a whole is projected to see a 7.1 per cent rise in passenger numbers and an 18.5 per cent jump in cargo volume this year. Even more significantly, sales of higher-margin premium seats are driving the rise.

Europe is the exception to the trend, however, with its industry forecast to post a $2.8bn loss. The euro crisis, slow GDP growth, labour strikes and the Icelandic volcano have made 2010 a difficult year for the continent so far, and prospects for the future remain uncertain. The ash cloud alone cost the industry $1.8bn, and could again shut down airspace at any time. Languishing consumer confidence and looming austerity budgets might also dampen passenger growth.

Despite this grim immediate outlook, there is some optimism for the continent. A UBS report released last week confirmed its bullish view for the sector within Europe, claiming that airline equities have been significantly oversold. Air France-KLM, for example, has seen its share price plummet 18 per cent in the last month, while easyJet is down 15 per cent. But UBS insists the fundamentals are sound, favouring Ryanair and Lufthansa as good investment picks: “Against the backdrop of volcanic eruptions and sovereign debt scares the management of airlines are consistently reporting positive passenger and yield trends.” Ryanair even plans to pay out €500m in dividends this autumn.

But IATA’s Steve Lott admits: “Our predictions and estimates have really been changing quite a bit over the last year. The industry has been through a rollercoaster ride.” So even with sunny prospects for 2010, airlines’ high sensitivity to oil prices and the recovery of global trade (see chart) means there could be some turbulence yet to come.