|
Edge
In Focus
Stagflation threatens industry outlook
The International Air Transport Association (IATA) downgraded
its industry profit expectations for 2008 to US$4.5 billion based on global
economic growth slowing to 2.6 per cent and an average annualised oil price
of US$ 86 per barrel. This is the second downgrading of the 2008 forecast
 In
September 2007 IATA predicted a US$ 7.8 billion profit for this year. The initial
impact of the credit crunch saw that lowered to US$ 5 billion in December 2007.
"We still expect a positive bottom line of US$ 4.5 billion, but it's turning
out to be a very tough year," said Giovanni Bisignani, IATA's director
general and CEO.
Skyrocketing oil prices during 2004-2008 were offset by efficiency gains and
rising consumer confidence. "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 US$ 86 per barrel for Brent, fuel represents 32
per cent of operating costs and a total bill of US$ 156 billion. Along with
the credit crunch and oil prices, 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 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 US$ 5.6 billion to over US$ 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:
North America: US$ 1.8 billion (down from US$ 2.8 billion in 2007)
Europe: US$ 1.8 billion (down from US$ 2.1 billion in 2007)
Asia Pacific: US$ 900 million (constant from 2007)
Middle East: US$ 200 million (down from US$ 300 million in 2007)
Latin America: Break-even (compared to a US$ 100 million loss in 2007)
Africa: US$ 300 million loss (improved from the US$ 400 million loss
in 2007).
Consolidation
"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 one 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."
|
