The Future Looks Bleak for the Airline Industry

Things continue to get bleaker and bleaker in the global aviation industry in 2008-09 with Alitalia the latest airline to file bankruptcy. The International Air Transport Association (IATA) is forecasting a collective industry loss of 5.2 bn US dollars in 2008, saying 26 carriers had gone a bust so far.

IATA’s Director General Giovanni Bisignani said, “The situation remains bleak. The toxic combination of high oil prices and falling demand continues to poison the industry’s profitability. We expect losses of 5.2 bn US$ this year,” he told media in a teleconference from Montreal.

Maintaining that 26 carriers had folded up worldwide due to the financial crunch, the IATA Chief said “more airlines have gone bust in 2008 than in the aftermath of 9/11” and a shocking 1,80,000 jobs have been lost in the civil aviation sector.

“It is a 500 bn dollar industry that suffers a debt 190 bn. So the financial situation is much weaker than after 9/11,” said the Chief of IATA, which represents over 200 major airlines across the world.
 
IATA announced industry traffic data for July, which showed a continued slowing of demand. July year-on-year passenger demand growth fell to 1.9 percent – the lowest in five years. Capacity increased by double that – 3.8 percent – indicating that service cuts are not keeping pace with the fall in demand.

This pushed the load factor for the month to 79.9 percent, a drop of more than 1 percent compared to July 2007. The surprise of July was a 0.5 percent drop in passenger demand by Asia-Pacific carriers partly attributable to a change in Chinese visa requirements, but also showing that economic weakness is spreading to previously robust economies.

Cargo demand in July contracted by 1.9 percent compared to 2007. Asia-Pacific carriers, the largest players in the cargo market were hit hard with a 6.5 percent drop in demand.

IATA significantly revised downward its traffic forecast for domestic and international markets. Passenger traffic is now expected to grow on average by 3.2 percent (was 3.9 percent) and airfreight volumes by just 1.8 percent (was 3.9 percent). This is only half the pace of expansion seen in 2007 and is boosted by the stronger growth seen at the start of the year. Strong traffic growth allowed the industry to partly absorb the rise in fuel costs from 2003 to 2007.

North American carriers are expected to post losses of $5 billion in 2008 making them the hardest hit by this industry crisis. Asia-Pacific is expected to see profits shrink from $900 million in 2007 to $300 million this year. European profits will tumble seven-fold from $2.1 billion in 2007 to $300 million in 2008. Middle Eastern profits will drop by $100 million to $200 million. Latin American and African carriers will see losses deepen to $300 million and $700 million, respectively.

The International Air Transport Association (IATA) announced a revised industry financial forecast that would see the global airline industry post losses of $5.2 billion in 2008 based on an average crude oil price of $113 per barrel ($140 for jet fuel). “While there has been some relief in the oil price in recent months, the year-to-date average is $113 per barrel. That’s $40 per barrel more than the $73 per barrel average for 2007, pushing the industry fuel bill up by $50 billion to an expected $186 billion this year,” said Giovanni Bisignani, director general and CEO of IATA. Fuel is expected to rise to 36 percent of operating costs, up from 13 percent in 2002.

By Karen Loftus