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With Commercial Freedoms Can Come Profitability

By Giovanni Bisignani Director General and CEO, IATA

The recovery from the global financial crisis is moving at a faster pace than anticipated. Traffic is now 3-4% higher than the pre-crisis levels of early 2008. And we expect a profit of $8.9 billion in 2010. Propelled by a strengthening global economy, this is significantly better than the $2.5 billion previously forecast.
Turbulence could still lie ahead. Businesses have restocked their warehouses and store shelves. This has been beneficial for our cargo business. But with a largely jobless recovery in Europe and the US, can consumers be persuaded to spend again? Until we have a clear indication, we should expect the pace of improvement to slow.

In the meantime, some great stories are emerging. One is Latin America. A decade ago, the region was characterized by government intervention and perennial losses. Today, the situation is very different. Latin America was the only region in the black in 2009 and this year we anticipate a profit of $1 billion.

What is behind this improvement? The courage to change that has been led by a core group of progressive airlines, including Avianca, Copa, GOL, LAN, TACA, and TAM. But there have been casualties in the transition. Varig, one of the industry’s great names, all but disappeared. One of the most interesting developments is the emergence of multinational brands and multihub networks.

The restrictions of the bilateral system have largely prevented consolidation across political borders. The mergers of British Airways and Iberia, Lufthansa with bmi, Austrian and Brussels Airlines, Delta and Northwest, and United with Continental have all followed this model. But the development of LAN with namesakes in Chile, Peru, Ecuador and Argentina has broken new ground.

The most recent proposed merger of LAN and TAM will result in a combined market capitalization of $12.8 billion. That is significant financial clout. The market capitalization of other big industry players such as Delta, Continental, United, Lufthansa or BA-Iberia falls into the $7-8 billion range.

Success in Latin America has also been fostered by a liberalized approach to market access. It proves that when airlines are able to operate as a normal business, sustainable profitability is possible. And success has come with better service levels, improved safety, and enhanced connectivity to power broader economic growth. Everybody is a winner: consumers, airlines, industry, and governments.

With more than 1,000 players operating in the industry, air transport remains the most hyper-fragmented global sector. And a historical profit margin of about 1% shows that we are also among the least profitable. This is out of sync with the important role that aviation plays in the global economy—supporting 32 million jobs and $3.5 trillion in economic activities.

Governments around the world should take note of the Latin American formula. Giving airlines commercial freedoms can clearly pay big dividends.

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