A $500 million boost in estimated airline industry profits for 2007 will be wiped out by a $1.8 billion decline in projected earnings growth next year, the International Air Transport Association (IATA) announced September 17.
The updated outlook means airlines should be spared the economic impact of rising oil prices and turmoil in the credit markets through the end of the year. IATA now forecasts industry profits in 2007 to rise to $5.6 billion, or $500 million more than its most recent projection.
But those same economic factors have caused IATA to slash its earnings forecast in 2008 from $9.6 billion to $7.8 billion, or by nearly 19%. The lower figure would still represent a historic high for the industry’s annual profits, but will likely reduce demand for adding new capacity into the system.
However, IATA’s updated report shows the impact on the industry from the crisis in the world’s credit market is hard to predict.
"If the credit crunch leads to real economic weakness this would damage airline market growth, but it would also reduce fuel and labor costs," IATA’s financial forecast says. "If central banks prevent the wider economy suffering from the credit market problems then fuel and labor costs could rise more than we forecast."
Airlines also remain vulnerable to economic shocks despite record profit margins because of the industry’s heavy debt load, IATA said.
IATA attributes the industry’s recent economic gains to managing capacity growth at a rate slower than overall traffic growth, which has led to an increase in yields per flight.
"We are clearly seeing the benefits of hard-won efficiency gains from restructuring," said IATA Director General and CEO Giovanni Bisignani, but added: "The impact of the credit crunch puts some question marks over the industry’s performance next year and the continuing high price of fuel will become more difficult to mitigate with efficiency gains."
IATA has raised its average fuel cost projection for 2007 from $63 per barrel to $67 per barrel.
Source: FlightGlobal.com
