Airline profits will halve due to high oil prices

AFP, Wednesday 2 Mar 2011

Air transport association bases forecast on crude rise

High oil prices will cut airline industry profits by nearly half this year despite the growth in air travel with the recovery, the International Air Transport Association(IATA) said on Wednesday.

In a revised profit forecast, IATA said it was downgrading its airline industry profit outlook for 2011 to US$8.6 billion from the $9.1 billion it estimated in December.

"This is a 46 per cent fall in net profits compared to the $16 billion earned by the industry in 2010," IATA said in a statement.
"The biggest shift in our forecast is the price of oil," IATA director general Giovanni Bisignani told reporters.

"Profits will be cut in half compared to last year and margins are a pathetic 1.4 per cent," he said.

Airlines are expected to face a fuel bill of $166 billion on revenues of $594 billion even as air travel grows faster than expected and capacity is added.

IATA increased its forecast for the growth in passengers to 5.6 percent in 2011 from its previous estimate of 5.4 per cent.

The new forecasts were based on oil prices averaging $96 per barrel of Brent crude over the year, compared to $84 a barrel used in the December forecast.

Unrest in the Middle East was pushing up Brent crude for April delivery above $115 again on Wednesday, after it rose to near $120 last week. IATA officials said the global economic recovery was propping up the industry's remaining profits, reviving travel and air freight.

But rising oil prices add to the uncertainties already tempering hopes for the recovery and have the potential to dampen economic growth if they last or grow further.

Bisignani said that the new figures demonstrated the fragility of the airline industry, which also has debts of $210bn, with signs of a reversal so soon after a swift post-global-crisis turnaround last year.

"There is no buffer against shocks," he said. "Everything that hits us has the potential to knock us over."

"This is an industry that is not sustainable in the long term."

IATA declined to comment on the prospect of fuel surcharges or increased ticket prices for passengers, saying those were matters for individual airlines.

All regions were expected to be affected to some degree.

Carriers in the Asia Pacific basin were still expected to deliver the largest collective profit of $3.7bn and operating margins three times above the global average at 4.6 per cent.

But IATA underlined that Asian airlines were the most exposed to fuel price shocks with less hedging than the global average.

In North America, airlines were expected to deliver $3.2bn in profits, but benefit from deeper cuts in capacity during the crisis to offset fuel price shock.

Europe was again regarded as the weakest link with the least profitable airlines and collective forecast profits nearly two-thirds below than last year's level due to weaker economy and slower market.

"The 500 million dollars of projected profit is really what I would call peanuts," Bisignani insisted.

IATA's chief, who is due to retire in June, said the figures illustrated the historic structural weakness of the industry's profit margins, claiming airlines were marooned in a "crazy situation" between liberalisation and state regulation or ownership.

"Is this a business?... This is a margin for a charitable association, 0.1 per cent in the last 50 years," he told journalists.

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