Airlines to lose USD 5.2 billion in 2008 – Slowing Demand and High Oil to Blame

IATA announced a revised industry financial forecast that would see the global airline industry post losses of US$5.2 billion in 2008 based on an average crude oil price of US$113 per barrel (US$140 for jet fuel).
“The situation remains bleak. The toxic combination of high oil prices and falling demand continues to poison the industry’s profitability. We expect losses of US$5.2 billion this year,” said Giovanni Bisignani, IATA’s Director General and CEO.
Fuel
“While there has been some relief in the oil price in recent months, the year-to-date average is US$113 per barrel. That’s US$40 per barrel more than the US$73 per barrel average for 2007, pushing the industry fuel bill up by US$50 billion to an expected US$186 billion this year,” said Bisignani. Fuel is expected to rise to 36% of operating costs, up from 13% in 2002.
Demand
IATA also announced industry traffic data for July which showed a continued slowing of demand.
July year-on-year passenger demand growth fell to 1.9% – the lowest in five years. Capacity increased by double that – 3.8% – indicating that service cuts are not keeping pace with the fall in demand. This pushed the load factor for the month to 79.9%, a drop of more than 1% compared to July 2007. The surprise of July was a 0.5% drop in passenger demand by Asia-Pacific carriers partly attributable to a change in Chinese visa requirements but also showing that economic weakness is spreading to previously robust economies.
Cargo demand in July contracted by 1.9% compared to 2007. Asia-Pacific carriers – the largest players in the cargo market – were hit hard with a 6.5% drop in demand.

As a result of the weaker economic outlook, IATA significantly revised downward its traffic forecast for domestic and international markets combined. Passenger traffic is now expected to grow on average by 3.2% (was 3.9%) and air freight volumes by just 1.8% (was 3.9%). This is only half the pace of expansion seen in 2007 and is boosted by the stronger growth seen at the start of the year. Strong traffic growth allowed the industry to partly absorb the rise in fuel costs from 2003-2007. This is no longer the case.
Regional
“While some regions will show small profits, the negative impact of the industry crisis is universal,” said Bisignani.
– North American carriers are expected to post losses of US$5.0 billion in 2008 making them the hardest hit by this industry crisis.
– Asia Pacific is expected to see profits shrink from US$900 million in 2007 to US$300 million this year.
– European profits will tumble seven-fold from US$2.1 billion in 2007 to US$300 million in 2008.
– Middle Eastern profits will drop by US$100 million to US$200 million.
– Latin American and African carriers will see losses deepen to US$300 million and US$700 million respectively.
2009
IATA announced its initial outlook for 2009. The difficult business environment is expected to continue. Most economies are expected to deliver even weaker economic growth next year, which will negatively impact air travel and freight. With an expected oil price of US$110 per barrel (US$136 for jet fuel) and continued weak growth (2.9% tkp), industry losses are expected to continue at US$4.1 billion. The 2009 fuel bill is expected to rise, as hedging offers less protection, to US$223 billion comprising 40% of operating expenses.
Change
“While we expect the bottom line to improve by about US$1 billion next year, the industry will be US$4.1 billon in the red,” said Bisignani. “This crisis is re-shaping the industry in more severe ways than the demand shocks of SARS or 9.11. When fuel goes from 13% of your costs to 40% in seven years with an increased cost implication of US$183 billion, you simply cannot continue to do business in the same way. Fundamental change is needed,” said Bisignani.
“Airlines have reduced non-fuel unit costs by 18% since 2001. Airports and air navigation service providers must join the effort. Efficiency gains are critical but cannot fully absorb the impact of skyrocketing fuel prices,” said Bisignani.
“This crisis is highlighting the need for greater commercial freedom. Airlines are facing enormous challenges. To be successful and continue providing jobs to 32 million people and supporting US$3.5 trillion in economic activity, airlines must be able to do business like any other business,” said Bisignani.
“More airlines have gone bust in 2008 than in the aftermath of 9.11. To cure the structural sickness of the industry, made all the more obvious by the high price of oil, we need a strong dose of liberalisation. The US-EU talks later this month are one opportunity to address ownership restrictions in an important market. And IATA is taking the unusual step of facilitating a global dialogue on an Agenda for Freedom next month in Istanbul. Simply weathering the current storm is not an option. We must take the opportunity of these extraordinary times to facilitate extraordinary change to strengthen the industry with normal commercial freedoms,” said Bisignani.