IATA Cuts Profit Estimates by A Third

The airline industry has reduced its forecast for profits next year by more than one third as soaring fuel costs and the credit crunch begin to take their toll.

With oil prices hovering around $100 per barrel, the International Air Transport Association (IATA) curtailed its industry profits estimates for 2008 by a third, to $5 billion from the $7.8 billion it predicted in September. In June, the IATA had prognosticated a profit of $9.6 billion and yesterday’s announcement is the second sharp earnings revision in less than six months.

IATA predicted that airline fuel bills will rise by an estimated $14 billion next year to $149 billion due to the high oil prices. Carriers that pay most costs in dollars will be bearing the brunt of the increase.

North American carriers are expected to see the largest fall in profitability, partly because they have the oldest and, therefore, least fuel-efficient aircraft. The region is also at the centre of the credit crisis, with implications for business travel.

Giovanni Bisignani, the Director General of IATA said, “The peak of the business cycle is over and we're still $190 billion in debt. The industry is heading for a downturn with little cash in the bank to cushion the fall.''

The IATA said that air passenger traffic grew 7.3 percent for the first 10 months of 2007, compared to last year. Despite apprehensions about the impact of tightening access to credit due to the subprime crisis, consumer demand for air travel has remained robust in most regions. But the increasing risk of a sharp U.S. economic slowdown in the course of next year threatens to restrict spending on air travel, particularly among business passengers.

Airline earnings have shown marked improvement in 2007 after six unprofitable years due to the dot-com stock bust of 2000 and the September 2001 terrorist attacks. The airlines industry had suffered a devastating $13 billion loss in 2001.

Non fuel expenses have been lowered by 16 percent since 2001 due to some aggressive efforts to cut costs. Also, sales and marketing costs have been lowered by 25 percent and labor productivity has climbed by 64 percent.

A glut of plane deliveries will raise seating capacity, exerting “downward pressure on yields and on revenues” in 2008, IATA chief economist Brian Pearce said.

He added, “Deliveries are still accelerating and we're going to be faced with a situation next year where deliveries of aircraft are rising as traffic is slowing.”

The IATA has predicted that revenue growth across the industry will slow to 4.7 percent in 2008 from an estimated 8.4 percent this year, as traffic growth falls to 4 percent from 5.9 percent.

The IATA has also prognosticated that European and Asian carriers would experience only minor falls in profitability, of $100 million each to $2 billion and $600 million respectively.

On the other hand, profitability of the Latin American air industry is expected to improve by $100 million, allowing the region to break even in 2008. Pearce said, “There's a lot of restructuring going on in Latin America that is starting to produce results.”