[SYDNEY] Airlines have been in unfamiliar territory of late: They've been earning money for their investors. Don't count on it lasting.
Antitrust officials are investigating whether US airlines are fixing prices, even as they inch toward a market-share war. Ryanair Holdings Plc predicts cheap fuel will stimulate "irrational price competition" among European carriers later this year. Qantas Airways Ltd is paying a A$90 million (S$91 million) bonus to staff whose industrial action grounded its fleet in 2011. And with tremors from China and Greece spooking markets, the Bloomberg World Airlines Index has fallen more than 10 per cent, meeting one definition of a market correction.
It's all a reminder that good times for airlines rarely endure. Carriers generate the slimmest returns for their investors of 29 industries worldwide, according to the International Air Transport Association. Warren Buffett once joked that someone should have shot down the world's first powered flight, saving investors the heartache.
"Airlines are not very profitable businesses," Tony Tyler, IATA's chief executive officer, said in an interview Friday with Bloomberg Television. "Even though we're forecasting a good year this year, overall margins will remain very tight in this industry. That's the way it is."
The global aviation industry should hit a milestone in 2015: Airlines will generate a return for shareholders above their cost of capital, according to IATA.
"For the first time, the industry on average will be creating value for its equity investors," IATA chief economist Brian Pearce said in a June presentation in Miami. In any other industry, he added, that would be "the minimum performance expected."
Investors aren't yet ready to celebrate. The Bloomberg World Airlines Index fell 12 per cent from its seven-year high April 27 through July 8, exceeding the 10 percent decline many traders consider a market correction. The US sub-index has fared even worse, down 23 per cent from its Jan 26 peak to July 8.
The Asia-Pacific sub-index was up 2.7 per cent Friday as of 9.55am in Hong Kong, driven by gains of more than five per cent for Chinese state-controlled airlines. Still, the index is down 12 per cent from its June 24 high.
The outbreak of nerves comes amid a bumper year for the industry, with airlines benefiting from slumping fuel prices and weaker competition.
Globally, airline fuel bills will fall about 15 per cent to US$191 billion this year, even as the amount of fuel consumed rises 4.3 per cent, according to IATA.
North American carriers will post US$15.7 billion of net income this year, according to IATA, up 40 per cent from last year. Passenger traffic is forecast to grow at its fastest pace since 2010.
Such good times can't last, according to Tony Webber, an aviation consultant and former chief economist for Qantas.
"Whenever airlines start making money, you always see too much capacity go back into the market," he said by phone from Copenhagen.
By adding extra seating or flying more frequently, carriers risk losing money on unfilled seats. In the US, Southwest Airlines Co grew capacity in January at the fastest pace since at least 2009. Delta Air Lines Inc. and United Continental Holdings Inc. are also adding capacity quickly.
That's pushing the domestic industry toward a market share war, according to Bloomberg Intelligence analyst George Ferguson.
"Rational competition always breaks down once companies return to profits," he said by e-mail.
The same dynamic is playing out in Europe, according to Ryanair, the continent's largest carrier by market value.
Lower fuel prices will lead competitors to steal market share from each other, resulting in "irrational price competition" later this year, Chief Executive Officer Michael O'Leary said on a May 26 investor call.
While every corporate executive worries about competition, some aspects of aviation make it uniquely cutthroat.
There are few industries where pressures from suppliers, consumers, distributors, competitors and alternative products are as tough as for airlines, according to a 2013 analysis done for IATA by Harvard professor Michael Porter. The top 10 airlines globally account for about 59 per cent of industry revenue, according to Bloomberg Intelligence data.
Airlines that spot a competitor making outsized profits can move quickly to compete, Hans Mitterlechner, a partner at Three Consulting Pty., said by phone from Sydney.
"Our most costly asset comes with its own wings, and can be redeployed in a completely different geography in a week," he said.
At least one major airline investor has seized the opportunity to take profits.
Franklin Resources Inc, until recently Qantas's biggest shareholder, has sold 264 million shares from its holdings since April 2014, worth about A$898 million at current prices. That includes a parcel of 22 million shares which changed hands this week.
Airline bosses still seem happier than they were a year or two ago, according to Con Korfiatis, the founding chief executive of Jetstar Asia who's now a partner at executive recruiter Heidrick & Struggles International Inc. But there's less confidence than there was three to six months back.
"There's more cautiousness creeping into their thinking," he said by phone from Singapore. "They're always asking themselves: 'Is that the light at the end of the tunnel? Or is it a train coming at me?'"