IATA: Airlines Will Lose US$5.2B in 2008

5 September 2008

The International Air Transport Association (IATA) forecasts that the global airline industry will lose US$5.2 billion in 2008 based on an average crude oil price of US$113 per barrel (US$140 for jet fuel) and decreasing demand.

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. 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.

—Giovanni Bisignani, IATA’s Director General and CEO

Fuel is expected to rise to 36% of operating costs, up from 13% in 2002.

Sharp downturn in demand. Click to enlarge. Source: IATA

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.

Regionally, North American carriers are expected to post losses of US$5.0 billion in 2008 making them the hardest hit by this industry crisis. Latin American and African carriers will see losses deepen to US$300 million and US$700 million respectively.

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.

IATA expects the difficult business environment to continue in 2009. 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.

Resources

• IATA Financial Forecast

• IATA July traffic figures