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Confidence Continues Freefall

July 23, 2008

By Boonsong Kositchotethana, Bangkok Post, Thailand

Jul. 23–Airline business confidence slumped to new lows in the second quarter of this year following a steep decline in the preceding quarter, and airline chief finance officers now expect a further deterioration in the next 12 months.

The July 2008 responses to a survey conducted by the International Air Transport Association (IATA) underscore the worsening business environment faced by airlines in recent months.

Only 10 percent of respondents expect to see profits rising over the next year, whereas 70 percent anticipate a further decline, compared to 61 percent in the April survey and just a year ago no respondents expected a decline.

The steep rise in fuel prices, now at over $160 a barrel, is the principle driver of this slump in business confidence, but there has also been an increase in the number of airlines reporting softening demand and intensifying competition, IATA economists noted.

Profitability of airlines fell to new lows in the second quarter, the second successive quarter where profits were expected to decline during the year ahead.

Only a quarter of respondents to the IATA survey reported that profitability had increased in the second quarter of this year, due to the increasing cost of fuel.

Further expansion in developing markets such as Asia, through new capacity and new routes, continued to provide a boost to demand, though this is increasingly offset by a slowdown in the US economy and by increased competition on many routes. But market growth outside the US is more than offset by the unprecedented rise in fuel prices. Fuel hit $180 a barrel in early July — 102 percent higher than a year ago — pushing input price expectations to new highs.

High fuel prices remain a concern for respondents, but weaker demand, the other half of a damaging stagnation scenario, is also cited as a major worry for profitability.

The survey also showed that a majority of airlines now expect to cut jobs in the next 12 months, reflecting the urgent need to restructure operations in the face of fuel price increases as capacity and costs are cut.

Several Asia Pacific airlines are reporting worrying declines in average load factors as the year progresses, a sign that rising travel costs and a slowing world economy are have an impact on demand, according to the Centre for Asia Pacific Aviation, the Sydney-based aviation consulting group.

Singapore Airlines, which expanded capacity by 9.5 percent last month, reported a 3.2 points reduction in load factor to 79.2 percent. Load factors in all regions declined, as the airline added significant amounts of capacity following the delivery of a number of new aircraft in recent months after earlier delayed deliveries.

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