Submit Press release  · eTN Team ·  Advertising  ·  eTN Awards  - Worldtourism Events    

Global Aviation Industry

Airlines may be forced to cut profit expectations

Jun 05, 2011

Fears that the global economic rebound may be winding down could force global airline executives to cut profit expectations for this year at their annual gathering beginning today in Singapore.

The US$600 billion airline industry is a bellwether of the global economy. Its annual profit forecasts, issued at the International Air Transport Association (IATA) meeting each June, are closely watched for demand trends in business and leisure travel, and in cargo haulage.

In March, the IATA forecast an $8.6bn worldwide profit for airlines, including $700 million of revenue for Middle East carriers. But the industry is now "less optimistic" and the threats to the March forecast are "very real", said Giovanni Bisignani, the chief executive of the IATA, which represents some 230 airlines and 93 per cent of global air traffic.

The consequences of unrest in parts of the Middle East and North Africa, high fuel prices and the Japanese crisis "will unfold over the coming months", he said.

Last year, airlines recovered rapidly from the downturn, posting a record global profit of $16bn, including $1.1bn for Middle East airlines. In Europe and the US, many airlines shed capacity, which also helped to prop up their profits. The growth came after a 10-year period when airlines collectively lost $50bn because of the effects on the aviation industry of the September 11 attacks in the US, natural disasters and health epidemics, as well as the global financial crisis.

The IATA gathering, which draws 700 airline executives each year, was supposed to have showcased the Middle East this year, and the growth of Egyptair, which was originally planning to host the event in Cairo. But the civil unrest that has hurt airlines across the region also persuaded IATA officials to relocate the event to Singapore.

A key worry for airlines is the cost of jet fuel. Andrew Herdman, the director general of the Association of Asia Pacific Airlines, said fares would need to increase by 10 per cent to compensate for high oil prices, but analysts have questioned whether carriers would be able to pass the full costs along to customers.

In its March forecast, the IATA estimated an average oil price of $96 per barrel for Brent crude for this year, but the year-to-date average has reached more than $110 per barrel.

"Last year we almost got used to [the oil price of] $80 a barrel and had a great year. But with oil prices at $100 and above, the challenge is how do you pass on that higher cost," Mr Herdman said.

Analysts have also pointed to slowing economic growth as a major concern for airlines.

"The airline industry often has to deal with setbacks, but there is real concern over the global economy," said Howard Wheeldon, a senior strategist at the brokerage BGC Partners in London.

"The trend in global traffic has remained flat," noted the Centre for Asia Pacific Aviation in a report last week. "This has raised concern that the post-recession rebound has run out of steam."

In the US, stock markets fell last week, with the Dow Jones Industrial Average hitting its longest streak of losses since 2004, after unexpectedly pessimistic reports on jobs and manufacturing. The Standard &Poor's 500 lost 2.3 per cent, its biggest weekly decline since August.

"It was a C-minus week for the economy," said David Sowerby, a financial manager at the US-based Loomis Sayles & Company.

"There was enough data this week to begin to connect the dots [and confirm] that uncertainty remains."

This year's IATA gathering takes place against a backdrop of growing trade tensions between the rapidly expanding Gulf airlines and the European and Canadian carriers lobbying their own governments to limit Gulf carriers' expansion into Europe and Canada.

Several panel discussions at the meeting will feature executives from Air Canada, Emirates Airline and Etihad Airways.

"Almost certainly there will be an air of unease," said Saj Ahmad, an analyst and blogger based in the UK. "Tim Clark [the Emirates' president] will almost certainly voice how open the UAE is, its progressive aviation policies and say that Canada needs to emulate their model," he said.

Airlines may be forced to cut profit expectations
Image via


Premium Partners