Stagflation threatens airline industry outlook - IATA

Santiago, Chile - 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% and an average annualised oil price of US$86 per barrel (Brent Crude). 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$5.0 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% improvement in labour productivity and an 18% 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% 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% this year (compared to a 3.2% drop in 2007).

Increased competition: The US-EU Agreement on Open Skies is increasing trans-Atlantic frequencies by 11% in April. London Heathrow and Spain are leading the change with an increase of 25% 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 1% - 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