IATA predicts financial downturn for airlines in 2008 on the back of higher fuel costs and the growing credit crunch
12 Dec 2007 – The International Air Transport Association (IATA) has revised downwards its outlook for 2008, predicting airlines will achieve profits of $5 billion, having previously forecasted $7.8 billion back in August before the spike in aviation fuel prices and the broadening impact of the credit squeeze took effect. It expects system-wide fuel costs for commercial aviation to reach $135 billion for 2007 and climb to $149 billion in 2008, accounting for 30% of all expenses.
For the first time since 2000, airlines will make a profit this year – estimated by IATA at $5.6 billion – and will fly a record number of passengers. “That is good news, representing a lot of hard work by airlines,” said Giovanni Bisignani, IATA’s Director General and CEO. “Since 2001, non-fuel unit costs dropped 16%, labour productivity is up 64% and sales and marketing unit costs decreased 25%. But with a 1.1% margin, the bottom line is still peanuts.
“The challenges get tougher in 2008. A favourable economic environment and effective efficiency measures helped mitigate the impact of high fuel prices and underpinned profitability improvements. With the credit crunch, that is changing. The peak of the business cycle is over and we are still $190 billion in debt.”
IATA calculates total passenger numbers for 2007 will reach a record 2.243 billion, a growth of 5.9% over 2006, and increase still further to 2.322 billion in 2008 but will represent a slowdown in growth to 4.0%, the smallest increase since 2003.
IATA points to a sharp rise in load factors on domestic and international markets as a key factor in boosting airline profitability. “However,” said Brian Pearce of IATA Economics, “in the past the industry has an unfortunate record of ordering aircraft at the cyclical peak and taking delivery during the subsequent downturn.”
He says this history will repeat itself, with around 1,300 new aircraft deliveries scheduled for 2008 at a time of slowing growth. “New capacity arriving at a time of slowing traffic will make it difficult to see higher fuel costs reflected in better yields. Economic strength had created a strong yield environment, allowing revenues to offset fuel costs. That is likely to disappear in 2008. Substantial efficiency improvements will be required just to limit the decline in industry profits to the $5 billion we now forecast for 2008.”
Although the US economy is likely to move very close to outright recession, believes IATA, the demand for oil is expected to be sustained by continuing robust growth in Asia and, to a lesser extent, Europe. The US domestic market still represents almost 30% of all enplanements but China and the rest of Asia make up more than 60% of incremental demand for oil. As a result, said Pearce, the airline industry will suffer weaker travel markets without the relief of a much weaker fuel price.
“At the time of our last forecast in August, the spot price of oil was $75/barrel and the market consensus forecast for 2008 was $66/barrel,” he went on. “Today, the spot price is $90 and almost hit $100 as supply concerns and investment flows pushed prices up further than expected. Oil prices are expected to fall in 2008 as a result of weaker economic growth, but that fall is from a much higher level than before. The consensus forecast is for oil prices to average $78/barrel in 2008, which is a much higher average price than we previously forecast and more costly than 2007.”
According to IATA’s Jet Fuel Price Monitor, as of December 7 the price of jet fuel stood at $108.70/barrel (or 258.9 cents/gallon), down 6.6% on a month ago but up 33.9% on a year ago.
At the beginning of the decade, fuel amounted to 14% of total airline expenses and has now more than doubled to 29% this year and is forecast to increase to 30% in 2008.