Stagflation causing bumpy airline outlook
In the second downgrading of the International Air Transport Association’s industry profit expectations, the IATA forecast significant decreases in profitability.
“We still expect a positive bottom line of US$4.5 billion, but it’s turning out to be a very tough year,†said Giovanni Bisignani, IATA’s Director General and CEO.
His suggestions for improving the struggling industry:
Ø A move towards more consolidation similar to European trends.
Ø Airlines need to grow into global businesses to spread the risk and benefits as other industries have done.
Ø Control restrictions must be minimized.
Ø Governments should drop restrictive foreign ownership rules.
IATA downgraded its industry profit expectations for 2008 to US$4.5 billion based on global economic growth slowing to 2.6% and an average oil price of US$86 per barrel.
This is the second downgrading of the 2008 forecast. In September of 2007, IATA predicted a US$7.8 billion profit for this year. The initial impact of the credit crunch saw that lowered to US$5.0 billion in December of 2007.
Skyrocketing oil prices during 2004-2008 were offset by efficiency gains and rising consumer confidence, according to the IATA.
“The broadening impact of the US credit crunch has brought buoyant consumer confidence to an abrupt end. Oil prices continue to rise. Demand is softening and after the 64% improvement in labor productivity and an 18% reduction in non-fuel unit cost attained since 2001, efficiency gains are much more difficult to achieve,†said Mr Bisignani.
At an average annual price of US$86 per barrel for Brent, fuel represents 32% of operating costs and a total bill of US$156 billion.
Along with the credit crunch and oil prices, three other key elements are impacting the performance of the industry, according to the IATA.
(1) Aircraft Delivery Cycle: The downturn in demand coincides with a stepping-up of aircraft deliveries – from 1,041 new aircraft in 2007 to an expected 1,231 in 2008. While some of this will be offset by retiring less fuel-efficient aircraft, real yields are expected to drop 4.1% this year (compared to a 3.2% drop in 2007).
(2) Increased competition: The US-EU Agreement on Open Skies is increasing trans-Atlantic frequencies by 11% in April. London Heathrow and Spain are leading the change with an increase of 25% each. Increased competition will put pressure on yields in these markets.
(3) Non-Core Assets: In the past two years non-core business significantly boosted the consolidated profits of airlines. In 2007 alone the contribution of non-core profits and asset sales almost tripled the airline business profit of US$5.6 billion to over US$15 billion. The crisis in financial markets will make asset sales more difficult in 2008.
All regions are expected to be profitable in 2008, except for Africa.
Report by David Wilkening
David
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