Airline Profits Cut in Half By Rising Oil Costs

Posted by Mike Tirone - Monday, June 6th, 2011

IATA readjusts its profit forecast for the year

The International Air Transport Association has been severely affected this year by political and environmental factors and has cut its 2011 airline-industry profit forecast by more than half.

The IATA claims that higher oil prices, political protests in the Middle East and North Africa, and the earthquake which hit Japan are the main reasons for their profit forecast to be cut by 54 percent.

The group, representing 238 airlines, predicts to still make $598 billion in sales this year, but only $4 billion in profits this year, which is a margin of 0.7 percent. One of the main factors of this decrease in profit is the average price of Brent crude oil being originally forecast at $96 a barrel but has now be changed to $110. The group says that every $1 increase in the price of Brent crude adds $1.6 billion to industry costs. 

“The oil price is a concern for the whole industry,” Singapore Airlines Ltd. (SIA) Chief Executive Officer Goh Choon Phong says. “And, it's not something within our control.”

IATA also has large concerns with their passenger and cargo growth, as their new profit estimate is much lower than originally projected, a 78 percent drop from last year's earnings.

Considering the uncontrollable events at the start of the year, the head of the IATA, Giovanni Bisignani is justified by describing this year so far as a “nightmare.” With political turmoil in North Africa and the Middle East in Libya, Egypt, Tunisia, and Yemen as well as the March 11 earthquake and tsunami in Japan (which accounts for almost 10 percent of global airline sales), global profits and growth are hit hard.

Passenger demand will continue to avoid being stagnant, wit h 4.4 percent this year, but is down from the March forecast of 5.6 percent. The same goes for cargo growth dropping from 6.1 percent to 5.5 percent.

With the IATA members accounting for 93 percent of the global passenger traffic, these factors will play a large role in the price of air travel in 2011. Carriers in 2010 made $18 billion while following their initial forecast in December the global profits look to be $8.6 billion this year. 

The rising price of oil will affect the entire industry dramatically, meaning that fuel will now account for 30 percent of the industry's costs this year. That is more than double from just a decade ago. And just within the past year, the price of Brent crude has risen by 61 percent, closing at just under $116 a barrel on June 3.

Carriers are being hit globally but thanks to the large economic growth in China and India, there are still some positives. Surprisingly, the Asia-Pacific aviation market will remain the most profitable even when factoring the severe drop in profit from Japan. Hong Kong's biggest carrier, Cathay Pacific Airways Ltd. (293) plans to boost passenger capacity about 10 percent this year and the stock has seen a small drop in the last six months.

“The future is in Asia,” says Bisignani. “What is impressive is the rate of growth – double digits in China.”

In North America, it's a different story. Delta Air Lines Inc. (DAL) has had a difficult 2011, as the stock started the year off at $12 and is now just hanging above $9, while also announcing plans to cut capacity by 4 percent and offering workers buyouts. While American Airlines Inc. (AMR) has seen with nearly a quarter drop in its stock and was ordered on June 2 by a judge to let Orbitz Worldwide Inc. (OWW) resume ticket sales as American stopped displaying data and selling tickets through Orbitz in December.

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