Airlines bracing themselves for turbulent times ahead

The International Air Transport Association (IATA) has forecast a difficult few years ahead for the aviation industry, with massive fuel bills and the European debt crisis taking a chunk out of airline profits. The aviation body has warned that if global GDP growth drops further and the economic crisis intensifies, Middle East airlines could face losses of up to $400 million (Dh1.5 billion), on a par with Latin America and double that of Africa. Tony Tyler, IATA's director-general and CEO, pointed out in Geneva yesterday that the Organisation of Economic Cooperation and Development's (OECD) last economic outlook carried a risk assessment on the European sovereign debt crisis, which caused IATA to develop a second scenario for 2012 taking into account the possibility of the Eurozone crisis deteriorating into a renewed recession. He said that the OECD's scenario would cut global GDP growth to 0.8 per cent. IATA estimates that this has the potential to cause global industry losses of $8.3 billion. "In this scenario, all regions would fall into loss," Tyler said. "Europe would be expected to post the deepest losses at $4.4 billion, followed by North America at $1.8 billion and Asia-Pacific at $1.1 billion. "The Middle East and Latin America would both be expected to post $400 million losses, while Africa would be $200 million in the red." Fuel sky high But it's not just the sovereign debt crisis that is poised to hit the bottom lines of global airlines — fuel prices are also having an impact. At an average oil price of $112 per barrel, the industry's 2011 fuel bill is expected to be $178 billion, up $2 billion from previous estimates. Fuel costs are relatively unchanged from the previous forecast at $198 billion, IATA stated in its 2012 forecast, adding that is based on oil at $99 per barrel, against a previous forecast of $100 per barrel. However, some relief in the fuel price would be expected, according to IATA's chief economist, Brian Pearce. He said that based on oil at $85 per barrel, the fuel bill would be $183 billion in 2012 and consume 31 per cent of costs. "That is how much fuel is going to take up of airlines' total bills next year," Pearce said. With Europe clearly going through a difficult time, Tyler said that the overall picture of an industry making a 1.2 per cent margin this year and less than one per cent in 2012 is certainly "far from healthy". "But there are some positives in that capacity is being managed well by individual airlines," he added. Demand to expand IATA expects passenger demand to expand by 6.1 per cent in 2011 as air travel growth persists at a stronger pace than expected. The figure is stronger than the 5.9 per cent forecast in September, but could be offset by a downward trend in cargo since the middle of the year, which means that cargo is likely to finish the year with a 0.5 per cent contraction in volumes and flat yields. In 2012, however, the passenger demand is expected to grow by four per cent (down from previously forecast 4.6 per cent), while cargo is expected to show flat growth (down from the previously forecast 4.2 per cent expansion). Passenger and cargo yields, meanwhile, are expected to remain flat in 2012, IATA said, adding that while this remains unchanged for cargo, passenger yields were previously forecast to grow by 1.7 per cent. Further, the slightly stronger-than-expected passenger performance is offsetting "worse-than-expected cargo performance" and "somewhat higher-than-anticipated oil prices", according to the IATA outlook.