Dan Thisdell/London
For airlines, 2011 is looking like a year of solid growth. International Air Transport Association figures for May show passenger traffic globally up 6.8%, outstripping by a full percentage point airlines' capacity growth. The Association of European Airlines' May forecast stands at 5% growth in revenue passenger kilometres this year - up from the 3.2% estimated back in March.
At IAG, the merged British Airways and Iberia, June revenue passenger kilometres were up 9.2%, with particular strength in premium classes despite just 6.7% capacity growth. Alaska Airlines shows RPK up 7.9% in June, and capacity up 6.8%
But while demand for air travel appears to be growing, all is far from well. As IATA director general Giovanni Bisignani puts it: "We still expect the industry to make $4 billion this year. That is a pathetic 0.7% margin and another shock could alter the industry's fortunes dramatically. It's another tough year for a very fragile industry."
BLACK GOLD
What Bisignani didn't mention was oil. The trend in crude prices - closely followed by jet fuel rates (see chart) - has been downward, and many experts expect that trend to continue for a while yet. But the truth is that even if the downward momentum continues to the $102/barrel or so, some forecasters say that for late 2011 or early 2012, airlines will be operating in an expensive environment compared with the relatively benign conditions that prevailed during 2010, when Brent crude averaged $80/barrel and the airline industry racked up an all-time profit record of $15 billion.
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The recent trend in jet fuel rates has been downwards |
When airlines start posting their half-year financials in a few weeks, oil prices are certain to weigh heavily. Bisignani's expectation of an industry profit may start to look doubtful.
The problem facing airlines trying to adjust is that their costs are roughly 40% internal - staff and facilities and fleet - and 60% external, including all the variable costs like passenger duties, landing fees, air traffic control charges and fuel. Office and staff costs have already been slashed, so it's hard to cut much more out of that 40%.
As the Association of European Airlines notes, fuel represented 25% of operating costs in 2010 but this is now 28%, assuming best-case hedging contracts against movements in fuel prices and the dollar-euro exchange rate.
The price of oil is impossible to forecast at the best of times, but forecasters face a daunting task right now, following the June decision by the International Energy Agency to release 60 million barrels, over 30 days, of its 1.6 billion barrel strategic reserve. The immediate impact was, as hoped, a dip in the price, from about $112 down to $103, and cynical market watchers are suggesting that the IEA's move was driven from Washington, DC, anxious to take the edge off gasoline prices before voters fill their tanks to drive away on summer vacations.
Brent rapidly recovered most of its pre-release price. Leo Drollas, chief economist at the Centre for Global Energy Studies in London, does expect Brent to average about $8/barrel less during the third quarter than without the IEA release, and he sees Brent trending downward to about $102 in January or February. But, after that, it should gain about $10 to finish next year right where it is now. Bank of America Merrill Lynch expects a 2011 average of $102.
The trouble, in Drollas's view, is that the IEA introduced a heap of volatility to the oil market. Traders will be asking whether another release will come later in the year, and, he says, Saudi Arabia's reaction is difficult to anticipate. The Saudis were probably prepared to increase production to make up for the loss of Libyan output, but are not pleased with the IEA's action, and in any case, are furious about the "embarrassing fiasco" of the OPEC June meeting collapsing with no agreement on how to respond to Libya.
For airlines, it's hard to know where the silver lining lies. As desperately as they need respite from high fuel prices, perhaps the most significant factor driving oil prices is the overall health of the global economy. There, the signs aren't good; Drollas notes that demand for gasoline, diesel and jet fuel have all been slowing.
Or, as Royal Bank of Scotland transport analyst Andrew Lobbenberg puts it, the real issue is whether or not airlines can pass high fuel costs on to passengers. The summer travel season looks solid, but weak consumer confidence might soon price out leisure travellers. If business travellers also cut back, the winter could be a hard one for airlines.
Source: Flight International
