IATA says rising fuel prices and a worsening worldwide credit crunch will crimp profits
In its latest forecast and snapshot of industry conditions, IATA lowered its forecast for 2008 total net industry profits from $9.6 billion to $7.8 billion.
The $1.8 billion reduction is almost entirely because of fuel costs. But a housing finance and mortgage crisis in the USA has spread to the economy as a whole and many US economists say recession fears are rising and justified. "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," says IATA director general Giovanni Bisignani.
The association's chief economist Brian Pearce says oil prices remained the industry's principal concern. IATA raised its forecast for the average oil price for 2007 to $67 a barrel, up from a forecast of $63 in June. Jet fuel represents 28% of the industry's total operating costs, but with crude oil prices hovering near $80 a barrel, operating costs will rise even further, Bisignani warns.
Even though airlines have been able to pass on some of this higher cost either as fuel surcharges or as higher fares, that would become more difficult in an economic downturn. "If the credit problems result in major losses at financial institutions there could still be significant damage to the outlook, particularly in the USA," Pearce says.
He notes that massive capacity additions by Asia/Pacific carriers, preparing for huge new opportunities in China and India, have totalled 42% since 2001. North American carriers added only 11% in capacity over this same period and have enjoyed far higher yields than Asian carriers.
While the outlook for next year has darkened, IATA has slightly raised its profit estimate for 2007 from $5.1 billion to $5.6 billion.
Despite the warning over 2008, Bisignani insists he remains an optimist, but repeated his call for more co-ordinated, concerted action on the environment, security, and safety. "The most pressing economic issue is emissions trading," he says. "We can either follow our successful model for safety or we can repeat the mistakes made in security. Governments have a responsibility to provide a stable regulatory environment for industry growth. Failure to agree on a global way forward on emissions trading will certainly lead to legal battles between Europe and the rest of the world - including the US."
This is, Bisignani concludes, "the last chance for governments to get it right".
Source: Airline Business
