Gloomy outlook for global aviation

The International Air Transport Association (IATA) today hacked 54 percent off its 2011 industry profit forecast after factoring in the high price of oil, natural disasters and political unrest.


After forecasting in March that the airline industry would make an annual profit of US$8.6 billion, IATA downgraded its estimate to US$4 billion.


This would be a stunning reversal of the fortunes of 2010 when the industry finished the year $18 billion 9n the black.


"That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance,” said Giovanni Bisignani, IATA's director general and CEO. The outgoing DG was speaking at IATA’s annual general meeting and air transport summit in Singapore.


“The efficiency gains of the last decade and the strengthening global economic environment are balancing the high price of fuel. But with a dismal 0.7 percent margin, there is little buffer left against further shocks."


Bisignani outlined some of the issues the industry would have to deal with this year.


“The cost of fuel is the main cause of reduced profitability. The average oil price for 2011 is now expected to be $110 per barrel (Brent), a 15 percent increase over the previous forecast of $96 per barrel. For each dollar increase in the average annual oil price, airlines face an additional $1.6 billion in costs.


“With estimates that 50 percent of the industry's fuel requirement is hedged at 2010 price levels, the industry 2011 fuel bill will rise by $10 billion to $176 billion. Fuel is now estimated to comprise 30 percent of airline costs-more than double the 13 percent of 2001.


"We have built enormous efficiencies over the last decade. In 2001, we needed oil below $25 per barrel to be profitable. Today, we are looking at a small profit with oil at $110 per barrel," said Bisignani.


He said the current fuel price spike was substantially different from the one that occurred in 2008. “First, while oil inventories are low, there is substantial spare OPEC and refinery capacity, which was not the case three years ago.


“Second, the monetary expansion that fuelled a surge in financial investments in commodities is ending, which will remove a major upward pressure on fuel prices.


“Nonetheless, volatility in the fuel prices remains one of the industry's major challenges.”


Despite high energy prices, world trade and corporate earnings continued to improve, and as a result, global GDP projections increased by 0.1 percentage points to 3.2 percent, which was supporting continued growth in demand for air transport.


However, growth rates for both cargo and passenger markets have been revised downward because of higher fuel costs. Cargo demand is expected to increase 5.5 percent and not 6.1 percent as predicted earlier.


Overall capacity (combined passenger and cargo) is expected to expand 5.8 percent, which is above the 4.7 percent anticipated increase in demand. The gap between capacity and demand growth has widened to 1.1 percentage points from 0.3 percentage points in the previous forecast.


“Due to schedule commitments and fixed costs, capacity adjustments are expected to continue lagging behind the fall in demand, driving load factors down,” Bisignani said.


By April, passenger load factors were hovering around 77 percent, more than a full percentage point below the 78.4 percent achieved for international traffic in 2010.


Aircraft utilisation is also falling. This decline in asset utilisation, represented by lower load factors and average hours flown per aircraft, is the most significant downward pressure on airline profitability.


Bisignani said robust economic conditions had given airlines some scope to partially recover higher fuel prices. This was reflected in an increased yield growth forecast of three percent for passenger traffic (double the previously forecast 1.5 percent) and 4 percent for cargo (up from the previously forecast 1.9 percent).


“The problem is that higher travel costs are now weakening price-sensitive demand and airlines are not expected to be able to offset higher costs with increased revenues,” the director general said.


But Bisignani warned that the key risk to the IATA outlook was a weakening of global economic growth.


“High energy prices will certainly have a slowing impact on economic growth. However, the impact will be mitigated by two factors. First, while high oil prices previously triggered recessions, today's economies (which generate a unit of GDP using just half the energy required in the mid-1970s) are less sensitive.


“Second, the corporate sector is cash-rich, business confidence is high, and world trade continues to expand at around nine percent annually.”


The International Monetary Fund and others have raised global growth projections, which would indicate a recovery in demand growth to the historical 5.6 percent level for the second half of 2011.


IATA's forecast for continued, albeit lower, airline profits despite $110 a barrel oil prices, is dependant on a strong economy to generate sufficient revenues to partially offset higher fuel costs.


Asia-Pacific carriers are expected to earn $2.1 billion – the most profitable of all regions. Even so, this was dramatically down from the $10 billion profit that the region achieved in 2010.


Airlines in this region are more exposed than others to cargo markets and fuel price fluctuations. Asia-Pacific airlines carry 40 percent of all air freight volumes, while low labour costs and relatively low hedging means fuel accounts for a bigger proportion of total costs.


In addition, the Japanese earthquake and tsunami are expected to dent the region's prospects for the remainder of the year. However, this will be more than offset by robust growth in both China and India.


“The continued dynamism of these economies means that Asia-Pacific is the only region where demand increases (6.4 percent) are expected to outpace capacity growth (5.9 percent).
(Source:http://www.cargonewsasia.com)