IATA cuts airline industry profit forecast by 10 per cent to $4.5 billion

Mumbai: The International Air Transport Association (IATA) today lowered its profit forecast for the airline industry worldwide by 10 per cent – in a second review in four months - due to rising oil prices and deepening global economic gloom.

IATA downgraded its industry profit expectations in 2008 to $4.5 billion based on global economic growth slowing to 2.6 per cent and an average annualised oil price of $86 per barrel (Brent crude).

This is the second downgrading of the profit forecast since September 2007 when IATA predicted a $7.8 billion profit for the year. The initial impact of the credit crunch saw that lowered to $5.0 billion in December 2007. (See: IATA chops industry profits forecast for 2008)

''We still expect a positive bottom line of $4.5 billion, but it's turning out to be a very tough year,'' said Giovanni Bisignani, director-general and CEO of IATA.

Skyrocketing oil prices during 2004-2008 were offset by efficiency gains and rising consumer confidence, IATA said.

''The broadening impact of the US credit crunch has brought buoyant consumer confidence to an abrupt end. Oil prices continue to rise. Demand is softening and after the 64 per cent improvement in labour productivity and an 18 per cent reduction in non-fuel unit cost attained since 2001, efficiency gains are much more difficult to achieve,'' said Bisignani.

At an average annual price of $86 per barrel for Brent, fuel represents 32 per cent of operating costs and a total bill of $156 billion.

Along with the credit crunch and oil prices, IATA said, three other key elements are impacting the performance of the industry:

Aircraft Delivery Cycle: The downturn in demand coincides with a stepping-up of aircraft deliveries - from 1,041 new aircraft in 2007 to an expected 1,231 in 2008. While some of this will be offset by retiring less fuel-efficient aircraft, real yields (adjusted for inflation and the US dollar) are expected to drop 4.1 per cent this year (compared to a 3.2 per cent drop in 2007).
 
Increased competition: The US-EU Agreement on `Open Skies' (see: US-EU open skies agreement rolls out in a depressed global environment: IATA)  is increasing trans-Atlantic frequencies by 11 per cent in April. London Heathrow and Spain are leading the change with an increase of 25 per cent each. Increased competition will put pressure on yields in these markets.

Non-Core Assets: In the past two years non-core business significantly boosted the consolidated profits of airlines. In 2007 alone the contribution of non-core profits and asset sales almost tripled the airline business profit of $5.6 billion to over $15 billion. The crisis in financial markets will make asset sales more difficult in 2008.

Regional Profitability: All regions are expected to be profitable in 2008, except for Africa. Compared to 2007, areas with strong commodity markets and strong ties to the booming economies of China, India and Latin America are in general doing better. By contrast, the US and Europe will see significant decreases in profitability.

According to IATA,regional profitability levels would be:

• North America: $1.8 billion (down from $2.8 billion in 2007)
• Europe: $1.8 billion (down from $2.1 billion in 2007)
• Asia Pacific: $900 million (unchanged from 2007)
• Middle East: $200 million (down from $300 million in 2007)
• Latin America: Break-even (compared to a $100 million loss in 2007)
• Africa: $300 million loss (improved from the $400 million loss in 2007)

''It's time for governments and labour to get serious about the future structure of the industry. A fragmented industry of over 1,000 players is generating net profit margins around 1 per cent - in a good year. There is no secure long-term future for an industry that is constantly on the verge of intensive care,'' said Bisignani.

''Labour must see the good results of the consolidation that we have seen in Europe and paint itself into the picture of even broader global consolidation. And governments must understand that the flag on the tail has lost its meaning. Airlines need to grow into global businesses, spreading risk and benefits in the same way that any other normal business would. Ownership and control restrictions must go. And a good starting point is the second stage US-EU talks which begin soon,'' he added.

IATA represents some 240 airlines comprising 94 per cent of scheduled international air traffic.