Global airline industry: Unprofitable | Bangkok Post: learning

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Thai Airways will lose money this year like many other airlines, only the 2nd time in its 51-year history. Airlines are rarely very profitable businesses.

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AVIATION

Struggling to gain altitude

Aviation offers lower returns than almost any other business, but its appeal goes beyond the bottom line.
13/02/2012
Boonsong Kositchotethana

Who said commercial airlines are good businesses?

With the exception of a small number of well-managed carriers or those operating with special state support, airlines in general are indeed lousy businesses when it comes to absolute returns to shareholders.

The figures compiled by the International Air Transport Association (IATA) bare it all: over the past nine years, the industry finished in the red for six years. Even in the profitable years, the margins were appallingly low.

The best profit margin the industry achieved was a mere 2.9%, in 2007 and 2010. The worst year was 2008, when record-high oil prices and the Wall Street meltdown sent airlines into a tailspin, with an industry return of minus 4.6%. 

This year is shaping up to feature red figures again, given the weak global economy and especially the uncertainties in Europe. IATA is forecasting a return of minus 1.4%, after growth of 1.2% last year and 2.9% in 2010.

In the past nine years, airlines as a whole suffered an aggregate loss of US$47.9 billion, outstripping the combined net earnings of $42.4 billion they were able to make in better years.

In its latest forecast, IATA, whose members control 84% of global air traffic, projects the industry could lose at least $8 billion this year, reversing last year's estimated earnings of $6.9 billion.

The recent collapses of two long-established carriers - the 66-year-old Hungarian flag carrier Malev and Spain's Spanair, which took to the skies in 1988 - underscore the grim financial reality the industry faces.

Closer to home, Thai Airways International is expected to report 2011 full-year net loss in the region of 10 billion baht, blaming the great floods in Thailand for weaker passenger and cargo traffic. The loss would be a reversal of the 15.35 billion baht it earned in 2010 with a net profit margin of 8.33% - its best in the 2007-11 period.

According to the Thai flag carrier's statistics, 2011 would be only the second money-losing year in its 51-year history, after the catastrophic 2008 when it lost 21.38 billion baht, citing high fuel costs and Thailand's political turmoil. THAI's profit margin that year was -10.55%. 

Executives in other industries, where double-digit profit margins are the order of the day, would shake their heads in pity at airlines, for which margins have been and will remain weak.

Over the last 40 years, the global airline industry has been in the black with a pitiful 0.3% margin. As IATA director-general Tony Tyler has put it: "This industry is about turnover with very little left over."

Meanwhile, airlines' share prices have continued to lose further ground. 

Even though share prices rallied at year-end by 12%, they were down 30% from the start of 2011, according to the Bloomberg Global Index.

The decline to levels last seen in early 2009 came as financial markets continued to expect further downward pressure on airline profits.

Rational and irrational

But when all is said and done, why does the airline industry continue to attract new entrants all the time and why are so few carriers departing?

Brian Pearce, chief economist at the Geneva-based IATA administrative centre, says it's hard to blame outsiders for asking those obvious questions. After all, he told the Bangkok Post, this is an industry which, even in its better days in the pre-9/11 era, yielded almost nothing to investors.

There are several elements involved, starting with the sentimental one - many people fall in love with aviation for its exciting, if not glamorous image.

"There is a touch of sentiment, much for the same reason people invest in football clubs and newspapers. There is an element of glamour there," he says.

But perhaps the more rational one is that the airline business is a fast-growing industry in many regions of the world, thus offering a good business case.

Some airlines do manage to make good profits, such as new entrants in the Middle East and South America, while well-managed network carriers such as Singapore Airlines and Emirates continue to show attractive balance sheets.

"These success stories encourage new players to jump onto the bandwagon," says Mr Pearce.

State ownership of airlines also helps explain why several carriers have remained in operation even though they should not be, especially when there is more efficient supply of assets around.

Governments are very protective of flag carriers, seeing them as a great way to project a national image or identity, especially at foreign airports.

Perhaps government involvement in so many airlines contributes to the fact that there are still so many carriers around - estimated to be around 1,000 worldwide and growing - and why the industry's profit margin is so low.

Several airlines have also been expanding their fleets by ordering new aircraft, adding capacity to an industry where there is already an oversupply.

Globally, airlines will need 30,900 new aircraft worth US$3.6 trillion over the next 20 years through 2029, 44% of them replacing older planes, according to the US planemaker Boeing. The world fleet is projected to almost double in size from 18,890 planes to 36,300 during this period.

"We've got an industry with too much capacity, partly because it is too difficult to shed capacities and partly because of regulations that were set in the 1940s and have not changed," IATA's chief economist points out. 

Airlines are forbidden in most parts of the world from merging across borders, something that would otherwise allow rationalisation and better economies of scale.

That's why airlines carry on, while in other industries you either go out of business or merge with a competitor - but that does not happen in the airline industry," says Mr Pearce. "So until the rules are changed by governments, it's very difficult to see the situation getting any better." 

In his view, airlines need to ensure more sensible increases in capacity, which could lead to an industry with better profit margins. 

With margins so slim or non-existent, are airline stocks a good buy?

Mr Pearce has an answer: "If you're good at picking the cycle and good at the timing, you can make a lot of money from the airlines, for the short term." 

Airline stocks are probably not for the long term or dividend-driven - not for buy-and-hold.

There have been success stories in the airline industry, though not for the majority of its players, which continue to face new challenges and volatility everyday. And if there are too many airlines flying, that's not necessarily a bad thing for consumers.

In short, this is about an industry that delivers great value to customers, providing cheap air travel at costs that are half what they were 30 years ago.

It is an industry that moves the world's economy, creating employment for 5.5 million people, but a difficult one for shareholders to make money. 

(Source: Bangkok Post, AVIATION, Struggling to gain altitude, Aviation offers lower returns than almost any other business, but its appeal goes beyond the bottom line, 13/02/2012, Boonsong Kositchotethana, link) 

Airline Industry Vocabulary

altitude - height above sea level ความสูงเหนือระดับน้ำทะเล

Struggling to gain altitude - meaning: 1. a plane might have difficulty gettting off the ground; 2. airline businesses have difficulty making money

aviation - the flying of aircraft การบิน  ศิลปและศาสตร์ในการบิน
returns - the amount of money that an investor makes from their investor
appeal - to cause someone to like or want something ดึงดูดใจ ทำให้สนใจ
the bottom line - profit, the money that a company makes

its appeal goes beyond the bottom line - meaning: people invest in the business not just to make profits (but also because they like airplanes or aviation, as a sort of hobby)

Aviation offers lower returns than almost any other business, but its appeal goes beyond the bottom line.

commercial - for business purposes
commercial airlines

Who said commercial airlines are good businesses?

exception - something that does not follow the general rule ยกเว้น

carriers - airline companies
well-managed carriers

state - government รัฐ
support - help, by giving money, for example สนับสนุน
operating with special state support - the government helps the airline

in general - as a rule (true over many cases, may not be true for any one case)

lousy - not good
lousy businesses
airlines in general are indeed lousy businesses

absolute - complete ทั้งสิ้น โดยสิ้นเชิง
absolute returns to shareholders - the money that investors who buy the company's stock shares make

With the exception of a small number of well-managed carriers or those operating with special state support, airlines in general are indeed lousy businesses when it comes to absolute returns to shareholders.

figures - statistics, numbers describing the economy
profit - money that you make from selling goods and services after all your costs have been paid กำไร

The figures compiled by the International Air Transport Association (IATA) bare it all: over the past nine years, the industry finished in the red for six years. Even in the profitable years, the margins were appallingly low.

profit margin - a percentage showing the relationship between the profit a company makes and the money that it obtains from sales,   often seen as a sign of the general efficiency of the company (See Wikipedia)

mere - not large or important เพียงเท่านั้น
a mere 2.9% - only 2.9%

worst - most + bad
the worst year was 2008

record - the best or most ever achieved สถิติ
record-high oil prices

meltdown - a sudden and complete failure of a system, organisation or company การล่มสลายอย่างกระทันหัน
Wall Street meltdown  

tailspin - when an airplane loses control and starts falling to the ground with its tail spinning

Wall Street meltdown sent airlines into a tailspin

industry return
an industry return of minus 4.6%  

The best profit margin the industry achieved was a mere 2.9%, in 2007 and 2010. The worst year was 2008, when record-high oil prices and the Wall Street meltdown sent airlines into a tailspin, with an industry return of minus 4.6%. 

feature - to include someone or something as an important part ทำให้เด่น
red figures - losing money

global - throughout the world ทั่วโลก
weak global economy

uncertainties in Europe - people don't know if and when European economies will have a financial crisis
forecast - a statement about what will happen in the future based on information available now พยากรณ์

traffic - the number traveling to a place during a period of time (people, aircraft, ships, trains, cars, trucks, etc.) ความหนาแน่นของจำนวนคน หรือยานพาหนะในช่วงเวลาใดช่วงเวลาหนึ่ง
air traffic - the airplanes flying in the air

This year is shaping up to feature red figures again, given the weak global economy and especially the uncertainties in Europe. IATA is forecasting a return of minus 1.4%, after growth of 1.2% last year and 2.9% in 2010. In the past nine years, airlines as a whole suffered an aggregate loss of US$47.9 billion, outstripping the combined net earnings of $42.4 billion they were able to make in better years. In its latest forecast, IATA, whose members control 84% of global air traffic, projects the industry could lose at least $8 billion this year, reversing last year's estimated earnings of $6.9 billion.

long-established - has existed for a long time ก่อตั้่ง  
recent collapses of two long-established carriers

flag carrier - the national airline for a country
underscore - to emphasise something or to show that it is important เน้นย้ำ

grim - unpleasant and making you feel upset and worried ที่โหดร้าย
reality - actually happening ความเป็นจริง

underscore the grim financial reality the industry faces

The recent collapses of two long-established carriers - the 66-year-old Hungarian flag carrier Malev and Spain's Spanair, which took to the skies in 1988 - underscore the grim financial reality the industry faces.

closer to home - meaning: related to Thailand
expected - believe will happen คาดว่า (จะเกิดขึ้น)

cargo - goods carried in a truck, plane, or train สินคา้ที่บรรจุในตู้สินค้า ขนส่งทางรถหรือรถไฟ (ในภาษาไทย บางครั้งเรียก ตู้คอนเทนเนอร์)
weaker passenger and cargo traffic - meaning: few passengers and little goods being transported

Closer to home, Thai Airways International is expected to report 2011 full-year net loss in the region of 10 billion baht, blaming the great floods in Thailand for weaker passenger and cargo traffic. The loss would be a reversal of the 15.35 billion baht it earned in 2010 with a net profit margin of 8.33% - its best in the 2007-11 period.

Thai flag carrier - the Thai national airline (partly owned by the government)
statistics - facts about something, described by counting them สถิติ

catastrophic - a terrible disaster, very bad; extremely damaging เหตุร้ายกาจม ความหายนะม ให้ผลหายนะอย่างใหญ่หลวง
the catastrophic 2008

citing - mentioning as a reason ให้ อ้างอิงเหตุผล
turmoil - a situation of great disorder, confusion and chaos ความปั่นป่วน

citing high fuel costs and Thailand's political turmoil. THAI's profit margin that year was -10.55%

According to the Thai flag carrier's statistics, 2011 would be only the second money-losing year in its 51-year history, after the catastrophic 2008 when it lost 21.38 billion baht, citing high fuel costs and Thailand's political turmoil. THAI's profit margin that year was -10.55%. 

double - to become twice as big, twice as much or twice as many เพิ่มเป็นสองเท่า
digit - any one of the ten numbers 0 to 9 ตัวเลข (0 ถึง 9)
double-digit profit margins - profit margins 10% and greater

pity - a strong feeling of sympathy that you have for someone because they are very unhappy or in a bad situation ความสงสาร
shake their heads in pity
a pitiful 0.3% margin

in the black - making money, profitable
in the black with a pitiful 0.3% margin

turnover - sales, sales revenue; total sales made in a given period of time  
This industry is about turnover with very little left over

lose further ground - get worse
share prices have continued to lose further ground.

share prices rallied - share prices increased in value

pressure - a force causing change

Executives in other industries, where double-digit profit margins are the order of the day, would shake their heads in pity at airlines, for which margins have been and will remain weak. Over the last 40 years, the global airline industry has been in the black with a pitiful 0.3% margin. As IATA director-general Tony Tyler has put it: "This industry is about turnover with very little left over."Meanwhile, airlines' share prices have continued to lose further ground.   Even though share prices rallied at year-end by 12%, they were down 30% from the start of 2011, according to the Bloomberg Global Index. The decline to levels last seen in early 2009 came as financial markets continued to expect further downward pressure on airline profits.

when all is said and done - when you have finished looking at the whole situation and analyzing it
attract - to cause someone to be interested in something ดึงดูดความสนใจ
attract new entrants - have new companies and investors enter and industry because it looks profitable

But when all is said and done, why does the airline industry continue to attract new entrants all the time and why are so few carriers departing

outsiders - person not belonging to the group (who does not know what is going on in the group)

obvious - clear; easy to see, recognise or understand ชัดเจน
obvious questions - questions that are good questions that anyone would ask

it's hard to blame outsiders for asking those obvious questions

Brian Pearce, chief economist at the Geneva-based IATA administrative centre, says it's hard to blame outsiders for asking those obvious questions. After all, he told the Bangkok Post, this is an industry which, even in its better days in the pre-9/11 era, yielded almost nothing to investors.

elements -  things

sentiment (noun) - feelings; a thought, opinion or idea based on a feeling about a situation, or a way of thinking about something กระแส, แนวความคิด, ความคิดเห็น
touch of sentiment - a little bit of sentiment or feeling
sentimental (adjective) - involving emotions (liking or not liking something for some reason)

glamour - the special excitement and attractiveness of a person, place or activity ความมีเสน่ห์
glamorous (adjective) 
image - the picture of something that people have in their mind, what people think about something ภาพลักษณ์ an opinion that people have about someone or something ภาพลักษณ์
glamorous image - a picture that people have in their mind of something being exciting

reason - an explanation of an event, why an event happened เหตุ ; เหตุผล ; สาเหตุ

There are several elements involved, starting with the sentimental one - many people fall in love with aviation for its exciting, if not glamorous image. "There is a touch of sentiment, much for the same reason people invest in football clubs and newspapers. There is an element of glamour there," he says. But perhaps the more rational one is that the airline business is a fast-growing industry in many regions of the world, thus offering a good business case.

network - a large system of connected parts, organisations, people, etc. เครือข่าย
attractive - worth having or doing; pleasant to see and look at น่าสนใจ
balance sheet - a written statement that shows the financial state of a company at a particular time. It lists the company's assets and all money owed (liabilities) (See Wikipedia)
attractive balance sheets  

Some airlines do manage to make good profits, such as new entrants in the Middle East and South America, while well-managed network carriers such as Singapore Airlines and Emirates continue to show attractive balance sheets.

success story - the story of a person who has achieved success in some activity (such as a rich business person, for example)
encourage - make people interested in and excited about doing an activity; cause someone to gain enthusiasm, motivation, and energy in what they are doing ปลุกใจ
players - participants in an industry, companies and individuals who compete in a market ผู้ค้าคนสำคัญ หรือผู้ค้ารายใหญ่

These success stories encourage new players to jump onto the bandwagon. State ownership of airlines also helps explain why several carriers have remained in operation even though they should not be, especially when there is more efficient supply of assets around.

efficient - doing a task with no waste of time, money or energy; produces a lot from few resources
assets - things owned, especially property and money สินทรัพย์
identity - who someone is

Governments are very protective of flag carriers, seeing them as a great way to project a national image or identity, especially at foreign airports. Perhaps government involvement in so many airlines contributes to the fact that there are still so many carriers around - estimated to be around 1,000 worldwide and growing - and why the industry's profit margin is so low. Several airlines have also been expanding their fleets by ordering new aircraft, adding capacity to an industry where there is already an oversupply.

capacity - the greatest amount of work that can be done (or traffic that can be handled) ความสามารถ (ความจุ) ในการจัดการ the amount of something that can be produced ความสามารถในการ (ผลิต)
oversupply - to much on the market; supply of the good is greater than demand (usually causing prices to drop, many go out of business, exit from the market) การมีสินค้าล้นตลาด

fleet - a group of ships, or all of the ships in a country's navy ขบวนเรือ
projected - expected, forecast; what people believe it will in the future

Globally, airlines will need 30,900 new aircraft worth US$3.6 trillion over the next 20 years through 2029, 44% of them replacing older planes, according to the US planemaker Boeing. The world fleet is projected to almost double in size from 18,890 planes to 36,300 during this period.

shed - lost สูญเสีย
regulations - official rules that control the way that things are done ระเบียบปฏิบัติ ระเบียบ ข้อบังคับ  กฎระเบียบ

"We've got an industry with too much capacity, partly because it is too difficult to shed capacities and partly because of regulations that were set in the 1940s and have not changed," IATA's chief economist points out. 

scale - size (relative size)
economies of scale
merge - (of two or more groups) to join together to become one การรวมกัน
competitor - a person, team or company that is competing against others ผู้แข่งขัน, คู่แข่ง

Airlines are forbidden in most parts of the world from merging across borders, something that would otherwise allow rationalisation and better economies of scale. That's why airlines carry on, while in other industries you either go out of business or merge with a competitor - but that does not happen in the airline industry," says Mr Pearce. "So until the rules are changed by governments, it's very difficult to see the situation getting any better." 

ensure - to make certain that something happens or is done รับรอง ให้ความมั่นใจ ห้การยืนยัน
sensible - reasonable, not too much or too little
sensible increases in capacity

cycle - a series of events repeated over and over again (in the same order)
dividend - the regular annual payment from a company's profits to the investors who hold the company's stock

In his view, airlines need to ensure more sensible increases in capacity, which could lead to an industry with better profit margins. With margins so slim or non-existent, are airline stocks a good buy. Mr Pearce has an answer: "If you're good at picking the cycle and good at the timing, you can make a lot of money from the airlines, for the short term." Airline stocks are probably not for the long term or dividend-driven - not for buy-and-hold.

majority - more than 50% of a group ส่วนมาก เสียงส่วนมาก ส่วนใหญ่
challenges - new and difficult tasks that require great effort and determination
volatility - changing suddenly and unexpectedly (bad because it makes it difficult to make decisions) ความไม่แน่นอน
consumers - people who buy things (individuals and families)
employment - having a paid job
struggling - having serious difficulties มีความยุ่งยาก

There have been success stories in the airline industry, though not for the majority of its players, which continue to face new challenges and volatility everyday. And if there are too many airlines flying, that's not necessarily a bad thing for consumers. In short, this is about an industry that delivers great value to customers, providing cheap air travel at costs that are half what they were 30 years ago. It is an industry that moves the world's economy, creating employment for 5.5 million people, but a difficult one for shareholders to make money.