UBS: Global Air Traffic To Rise 5 Percent In 2011

UBS analysts this month issued a research report on the global airline industry, commenting that "recovery has been stronger than previously anticipated." They cited a "swelling, travel-oriented, middle class in Asia and the globalization of business" as key factors for a predicted 5 percent global traffic increase for 2011.
"The global GDP recovery continued to benefit airlines during the first half of 2010, with global traffic up over 7 percent (it certainly would have been higher had it not been for the Icelandic volcanic disruption)," they wrote. "Although we expect global GDP growth to moderate in 2011 (the disappointing economic data of late has raised market concerns over global growth), we retain our 5 percent 2011 global passenger growth forecast."

UBS also noted that "global airfreight is still highly correlated with global trade and general economic activity," and that it had "upgraded our forecast for volume growth in 2010 to 19 percent (from our previous 11.6 percent call, made in September 2009), and forecast a return to more normalized growth in 2011, namely 6 percent. This is in line with IMF estimates for global trade growth, and historical levels."

UBS analysts in their report remarked on several U.S. carriers. Delta's management, they wrote, "has the opportunity to extract meaningful synergies [following the Northwest Airlines merger] over the next couple of years, although they have yet to appear in results. The stock has lagged its peers, yet has the same international and corporate exposure, which is why we have made it a top pick."

United Airlines "has the strongest free cash flow profile in the sector, which should facilitate superior balance sheet repair" in the course of a planned merger with Continental Airlines, while United's unit revenue growth "has outperformed the industry."

American Airlines, according to UBS, "still faces a number of structural issues such as labour disadvantage, pension deficit and fleet renewal," but the carrier "should benefit from the ongoing recovery in corporate travel."

At low-cost pioneer Southwest, the analysts continued, "it appears that the business model is reaching maturity, and this is forcing a change to its philosophy. Additional revenue sources will be needed to maintain margins, so the company is targeting more business traffic."

UBS described US Airways as a "tweener," meaning it has neither low costs nor the scale, scope and costs of a traditional legacy carrier. "The company's liquidity was a concern when fuel prices were at their height, but looks substantially better now," according to the report. "Furthermore, operations are running well, costs are being controlled and capacity growth remains limited. We remain positive on the story."