British Airways has surged back into profit after two years of record losses in the latest sign of a marked recovery among the world's leading airlines.

BA beat analysts' forecasts as it posted a pre-tax profit of £158m for the six months to the end of September, reversing a loss of £292m during the same period a year ago when the industry was battling the downturn that followed the 2008 collapse of the Lehman Brothers investment bank.

"To get the business back into profitability has been a very hard job and I think everyone in BA deserves credit," said Willie Walsh, chief executive, as he presented what is likely to be the airline's last set of standalone results ahead of its planned merger with Iberia.

The Spanish flag carrier, which released its third-quarter results, said it too had swung back into profit after sharp losses a year ago.
International longhaul airlines such as these two were especially hard hit in the downturn, which emptied seats in the business and first class cabins that generate a large portion of their passenger revenues.

But the economic recovery has seen this so-called premium traffic return in droves. At the same time, airlines have cut back on capacity, so the added demand has pushed up yields, or average fares.

"There's not really any volume growth in terms of passenger numbers," said Deutsche Bank transport analyst, Geoff van Klaveren.
"It's all coming from higher pricing, which is basically driven by longhaul premium traffic. At the same time, industry capacity has been quite constrained and demand has come back, so that's resulted in a good improvement in prices."

Eoin Treacy's view From 2007, airlines suffered first from failing to hedge their exposure to rising fuel prices in a bullish environment for oil and subsequently from the drop off in passenger numbers that followed the credit crisis. In response, they have cut costs, routes, overheads and a slew of mergers have occurred. The share prices of British Airways and Iberia suggest that their imminent merger is being seen as a positive by shareholders, but the sector generally exhibits signs of increased investor interest. On first glance this could be construed as speculation that the pace of mergers will continue. However, when viewed from a global perspective it also reflects the increased cargo traffic fuelled by Asian and Latin American growth as well as the return of demand for international travel.

Asian airlines such as China Airlines, Thai Airways and Cathay Pacific have all rallied impressively over the last two years and have recently become temporaily overextended relative to their 200-day MAs. China Airlines remains the regional leader and while overextended, has a reasonably consistent uptrend where the progression of higher reaction lows would need to be broken to signal the onset of a lengthier period of consolidation. Thai Airways and Cathay Pacific are both in the region of their previous highs and look susceptible to a pause, allowing the overbought condition to be unwound. Korean Air has paused in the region of the 2007 peak since July, held the majority of its gains and has enabled the MA to catch up. A sustained move above KRW80,000 would indicate a return to medium-term demand dominance. Singapore Airlines, All Nippon Airways and China East Air have all sustained a progression of higher reaction lows over the last 18-months and these would need to be taken out to question medium-term upside potential. Qantas is testing the upper side of a yearlong range.

In Europe, Deutsche Lufthansa is outperforming the DAX and has risen for the last 11 consecutive weeks. It is somewhat overextended relative to the 200-day MA and while susceptible to a consolidation of recent gains, a sustained move below €13 would be required to question medium-term upside potential. Ryanair, Aer Lingus and Air France all have base formation completion characteristics

In the USA, Alaska Airways is the clear leader. United Continental broke out of a six-month range earlier this month. Southwest Airlines and Delta are testing their April highs. Jet Blue is testing the upper side of an almost three-year base and US Airways Group successfully broke above $10 this week; completing a more than two-year base.

The commonality across the global airline sector is consistent with the global economic expansion. Laggards in all regions are displaying significant catch-up potential.

Higher fuel prices remain a medium-term threat to the industry and in such an environment, companies with access to cheap fuel such as those in the Middle East or with an effective hedging strategy are likely to outperform.