With oil prices hitting $130 a barrel, IATA carriers see losses, failures and mergers on the cards
What a difference a year makes. At its annual meeting in Vancouver last year, IATA director general Giovanni Bisignani had the pleasure of delivering an industry profit forecast for 2008 of $9.6 billion. That would have been a record for this industry, beating the $5.6 billion achieved in 2007.
It is not to be. In early June in Istanbul at its 2008 gathering, Bisignani had the depressing task of telling the audience that the industry will dive into the red to the tune of $2.3 billion this year. "This is an emergency situation," he said. "It is a situation where we have a cost problem and a revenue problem."
While slowing demand has played its part in this colossal turnaround - the best hope for this year is 3.9% traffic growth - the main culprit is the incredible rise in the price of fuel. Since 2000 oil prices have risen steadily from around $35 a barrel to above $80 last year. IATA is basing its 2008 loss forecast on $107 per barrel, which equates to an industry fuel bill of $176 billion, $40 billion more than in 2007.
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As IATA's meeting convened oil had climbed again to $130 a barrel, with some predicting the price will continue upwards. "Twenty-four airlines went bust in the last six months and $130 per barrel oil is reshaping the industry even as we speak," said Bisignani. In a typical year just eight or nine carriers go bust.
"I think if the oil price moves suddenly to $200 it is a catastrophe," said Idris Jala, the chief executive of Malaysia Airlines in a video interview at the IATA meeting with Airline Business. "But I think even if the oil price moves slowly to $200 that's not a catastrophe because there is time to manage the transitionThe speed at which it moves is the problem. There will be companies that go bankrupt and cannot survive this."
Most are predicting more failures in the coming weeks and months. David Savy, the chief executive of Air Seychelles, said: "A number of airlines are living on borrowed time, and it is only a question of time before we start to see casualties. For Europe I believe this will only be after the peak of summer, but for other areas it might be even sooner."
"Ultimately the world needs aviation," said Steve Ridgway, chief executive of Virgin Atlantic. "Aviation has enabled the global economy so aviation has to survive. Aviation has to be profitable. We have to go on investing in new planes - that's part of our environmental responsibility at the very least. So the industry has to be viable. Therefore there is going to be a lot of reshaping. Airlines are going to go out of business. There is going to be mergers. There is going to be acquisitions. There is going to be a need for capacity cuts. Old equipment is going to need to be retired. It's going to be a very interesting two years I think."
In the USA, where soaring fuel prices have already pushed several carriers out of business, "we are in the worst crisis since 9/11, though this is worse", said John Heimlich, chief economist at the Air Transport Association. "In 2001, we were responding to a single catastrophic event now we are suffering in response to a lengthy catastrophic process in the form of oil prices."
Most believe the old adage of the strong getting stronger and the weak growing weaker will apply. In Europe, "it's fairly straightforward", says ABN Amro analyst Andrew Lobbenberg. "The three main flags [Air France-KLM, British Airways and Lufthansa] and the two main low-cost carriers [easyJet and Ryanair] will come out of this crisis stronger."
"It comes down to who's got the strongest balance sheet and who's got the greatest pricing power," says Damien Horth, head of Asia transport research at UBS in Hong Kong. In Asia that boils down to the big three: Cathay Pacific, Qantas and Singapore Airlines. "UBS has only SIA and Qantas profitable with $150 jet fuel. Everyone else is debatable."
IATA's Bisignani noted that the industry has done a good job in lowering its overall costs since 2001, with non-fuel unit costs dropping by 18%. But the big wins on costs have been taken by most carriers. "Now they have wrung the towel dry and to get more revenue to offset the increased costs of fuel is becoming quite impossible and this is why I think the final bell has rung," said Savy of Air Seychelles.
"It's going to be ugly," says Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation. And according to Chris Tarry, chairman of UK-based CTAIRA: "This downturn has the potential to be orders of magnitude worse than it was after 9/11 and more pervasive."
For more on the grim outlook from analysts, see: flightglobal.com/analysis
IATA Video interviews
Airline Business enlisted former Caribbean Airlines chief executive Peter Davies to conduct on-camera interviews with attendees of the IATA summit. Interviews include British Airways chief Willie Walsh, Virgin Atlantic chief Steve Ridgway and Jet Airways chief Naresh Goyal. flightglobal.com/iatavideo
Source: Airline Business
