IATA Warns of Lower Profits for Airlines

By Boonsong Kositchotethana, Bangkok Post, Thailand

Dec. 13–GENEVA — The growing credit crunch arising from the US sub-prime mortgage mess and higher oil prices are sharply weakening the profit outlook of the global airline industry next year.

Envisaging a cyclical downturn in 2008, the International Air Transport Association (IATA) yesterday lowered its forecast for industry profits to US$5 billion, down significantly from its projection earlier this year of $7.8 billion.

The economic outlook has deteriorated sharply since IATA last made a forecast in August, while oil prices have ballooned well beyond expectations.

The broadening impact of the US credit crunch, which is expected to cause up to $200 billion in potential losses at financial institutions, is expected to slow airlines’ revenue growth next year to 4.7 percent and traffic growth to 4 percent.

“The peak of the business cycle is over and we are still $190 billion in debt. So we could be heading for a downturn with little cash in the bank to cushion the fall,” IATA director-general Giovanni Bisignani said at a briefing.

However, the airline industry appears to be on course to report a combined net profit of $5.6 billion in 2007 as estimated, the first year since 2000 that the industry will have finished the black, according to IATA chief economist Brian Pearce.

To date the industry has been able to cope with increasing fuel bills because economic growth has been strong, thus boosting revenues and load factors significantly, he explained.

“But now the support of strong growth is falling away, without the relief of significantly lower fuel prices,” he noted.

The airline industry seems likely to suffer the worst of both worlds. Air traffic markets are still heavily weighted toward the United States, while demand for oil is shifting toward Asia.

Since the credit crunch is expected to push the US economy close to a recession but leave China relatively unscathed, airline revenues will slow but oil demand will keep fuel prices relatively high.

IATA, which represents 240 airlines, expects North American carriers in 2007 will resume the status they had in the late 1990s as the most profitable. They should retain that position in 2008 even as they bear the brunt of a fall in profits, while robust traffic within and to Asia will help Asian and European airlines. Nevertheless, IATA expects to see airline revenue growth slowing from 8.4 percent to just 4.7 percent to $514 billion in 2008, compared to $490 billion in 2007.

With crude now almost $100 a barrel, IATA has revised its forecast to an average of $78 a barrel next year, much higher than the $66 it envisaged back in August.

High oil prices will push airlines’ fuel bills up through 2008 to just below $150 billion, from around $140 billion estimated in 2007. Oil prices represent about 30 percent of airlines’ operating costs.

Mr Bisignani also expressed concern about the significant rise in aircraft deliveries to airlines at a time when traffic growth will be slowing.

Aircraft deliveries are expected to rise from 1,041 in 2007 to 1,281 in 2008.

Mr Pearce pointed out that the new capacity arriving at a time of slowing traffic will make it difficult to see higher fuel costs reflected in better yields.

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