IATA slashes airlines' profit forecast in the wake of oil prices, japan crisis

The International Air Transport Association slashes the airline industry's profit forecast for 2011 by more than half to $4 billiondue to the sharp rise in oil prices, natural disasters and unrest in the Middle East and North Africa.

The International Air Transport Association (IATA) on Monday slashed the airline industry's profit forecast for 2011 by more than half to $4 billion from $8.6 billion forecast in March this year due to the sharp rise in oil prices, natural disasters in Japan and unrest in the Middle East and North Africa.

According to an IATA statement, the new figure represents a 78 per cent drop against the $18 billion net profit recorded in 2010. A profit of $4 billion on expected revenues of $598 billion works out to a minuscule 0.7 per cent margin.

Asia-Pacific carriers, which include Indian airlines, are expected to earn $2.1 billion - the most profitable among all the regions. Even so, this is dramatically down from the $10 billion profit that the region achieved in 2010. Airlines in this region are more exposed than others to cargo markets and fuel price fluctuations.

According to the statement, the higher growth in both China and India means that Asia-Pacific is the only region where the rise in demand (6.4 per cent) is expected to outpace capacity growth (5.9 per cent). Meanwhile, India, along with UK, Germany and Austria, came in for strong criticism for imposing high service tax on air tickets with IATA director general and chief executive officer (CEO) Giovanni Bisignani warning that this would "kill the goose that lays golden eggs."

Addressing the IATA annual general body meeting in Paris, he said governments need a textbook on aviation's role as an economic catalyst and the first chapter should be entitled 'Basta (enough) to More Taxation'. The cost of fuel is the main cause of reduced profitability. The average oil price for 2011 is now expected to be $110 per barrel (Brent), a 15 per cent increase over the previous forecast of $96 per barrel. For each dollar increase in the average annual oil price, airlines face an additional $1.6 billion in costs.

With estimates that 50 per cent of the industry's fuel requirement is hedged at 2010 price levels, the industry's fuel bill in 2011 will rise by $10 billion to $176 billion. Fuel is now estimated to comprise 30 per cent of airline costs - more than double the 13 per cent of 2001.

"We have built enormous efficiencies over the last decade. In 2001, we needed oil below $25 per barrel to be profitable. Today, we are looking at a small profit with oil at $110 per barrel," Bisignani said in Paris. Despite high energy prices, world trade and corporate earnings continued to improve. As a result, global gross domestic production (GDP) projections rose by 0.1 percentage points to 3.2 per cent, supporting continued growth in demand for air transport.

However, growth rates for cargo and passenger markets have been revised downward due to higher fuel costs. Passenger demand is now expected to grow 4.4 per cent over the year, 1.2 percentage points below the 5.6 per cent forecast in March. Similarly, cargo demand is expected to rise by 5.5 per cent against 6.1 per cent predicted earlier.

Courtesy: Mail Today