Air China Ltd. has already opted for growth, adding 9.8 percent more seating in April and planning a 12 percent increase this year as it takes delivery of 33 new aircraft through 2011. In Europe, carriers have been more cautious, with capacity at Air France-KLM Group, the regional No. 1, unchanged last month.

Recovery trends following the Sept. 11 attacks, the Asian financial crisis and the outbreak of Severe Acute Respiratory Syndrome suggest carriers should err on the side of caution. While adding planes, frequencies and routes will lift sales, offering too many seats too quickly can erode occupancy levels, leading to fare discounting and shrinking profitability.

“We grew quite aggressively in the late 1990s and one of the things we learnt was that margins tend to go down quite quickly,” British Airways Plc Treasurer George Stinnes said in an interview. “The minute you put a chunk of capacity in -- rather than doing it carefully -- you start to impact pricing.”

British Airways, Europe’s third-biggest carrier, had aimed to lift seating 1.3 percent last month before strikes by cabin crew prompted a 4.7 percent drop.

Traffic rose 5.8 percent globally in the first four months, even after the Icelandic ash cloud grounded flights, recovering from a record 3.5 percent decline in 2009 and helping to fill 77 percent of available seats.

Production Concern

While carriers have so far shown restraint in chasing that demand, with capacity up 1.6 percent through March 31, before the effect of the ash plume, that could quickly change as Airbus SAS and Boeing Co. begin to accelerate deliveries to companies such as Air China, said Chris Tarry, an independent analyst in London who has followed the industry for more than two decades.

“The concern is that we’re going to get a lot of capacity coming in quickly,” Tarry said. “That’s because much of the downward adjustment was from planes being flown less, and it’s very easy to turn the taps back on, and because aircraft production rates are being pushed back up to what they were.”

Air China fell 3.9 percent to HK$7.55 at 11:28 a.m. in Hong Kong trading today. The carrier has gained 24 percent this year.

The financial performance of carriers in the rebounds that followed previous slumps suggests that traffic growth alone isn’t enough to deliver sustained profitability.

Industry Losses

After the Sept. 11 attacks the industry suffered losses for six years, according to International Air Transport Association figures. In 2005, with passenger numbers 23 percent higher than in 2001 at 2.02 billion and sales up 36 percent at $413 billion, the industry still lost $4.1 billion. Over the same period fare increases consistently lagged the rise in expenses.

IATA’s latest guidance, issued today, suggests carriers will post a profit of $2.5 billion this year, reversing a $10 billion loss in 2009, rather than the $2.8 billion deficit it had predicted as recently as March 11.

Passenger traffic is likely to rise 7.1 percent, up from an estimate of 5.6 percent, IATA said, while yields, a measure of ticket prices, may advance 4.5 percent versus a prior 2 percent prediction, recovering from a 14 percent decline in 2009.

Still, IATA says boosting seat occupancy will be “a challenge” as the rebound slows and 1,340 new aircraft are delivered through the year. The industry has posted a profit in only two of the past nine years, accruing losses of $50 billion.

‘Driving Yields’

U.K. billionaire Richard Branson’s Virgin Atlantic Airways Ltd. cut capacity 20 percent starting in 2008 as the credit crunch hurt its key London-New York business-travel market. Even with premium traffic up 7.6 percent globally in the first quarter, versus a 7.4 percent gain in coach, Virgin’s capacity remains 10 percent below peak levels, CEO Steve Ridgway said.

“The recovery is now as much about driving yields as load factors, given how much prices fell, so it would be silly for airlines to rush back wholesale with more capacity,” Ridgway said in an interview in London on June 4. “We’ll see, but I’m hopeful that the lessons have been learnt.”

IATA CEO Giovanni Bisignani, who delivered the updated assessment of the industry’s prospects to airline leaders at the organization’s annual meeting in Berlin today, says he’s upbeat about capacity restraint after leading a campaign for carriers to impose tighter controls in the past.

“This is a decision for the airlines, but if they’re wise they’ll try to balance the increase in demand with the correct capacity,” Bisignani said in an interview. “We’ve seen that carriers around the world have become better at this and they seem to have learned the lessons of the past.”

‘More Comfortable’

While Stinnes of British Airways describes adding capacity too quickly as being in the “history of the industry,” he says he’s also optimistic that the level of losses suffered has engendered a more circumspect approach to expansion.

“I have to say if you look at people talking now, at the French, the Germans, certainly the Americans, everyone is pretty cautious,” he said. “I’m as comfortable as I’ve been for a long, long time that this going to be fairly sensible.”

Wolfgang Mayrhuber, head of Deutsche Lufthansa AG, Europe’s second-biggest airline, said in an interview prior to the IATA gathering yesterday that his focus, too, is on fares.

“We want to have yield back,” Mayrhuber said. “We don’t want to fall short of market development. But we’re not growing the number of flights or the number of planes.”

The crunch may come as airlines face competition from rivals based in regions where demand for travel is more buoyant.

In the first three months of 2010 traffic rose 4.3 percent in Europe, compared with growth of 10.5 percent in the Asia- Pacific region and 25 percent in the Middle East.

“We seem to be managing to keep capacity and yields in balance,” said Maurice Flanagan, vice chairman of Dubai-based Emirates, which on average is adding an Airbus A380 and a Boeing 777 every month for the next twelve years. “In fact we’re short of capacity. There is a large number of destinations which we know we could profitably serve but do not have the planes.”

Source: Bloomberg