Airlines facing turbulence on oil, eurozone crisis

The aviation industry is facing some challenging times, the World Air Transport Summit in Beijing was told yesterday.The International Air Transport Association (Iata) had some gloomy forecasts for this year, expecting profitability to plunge on volatile oil prices as well as the uncertainties prevailing in the oil producing regions.Iata director general and CEO Tony Tyler, speaking at the Iata annual meeting here, said, “The state of our industry is fragile. “We expect revenues of $631bn but a profit of just $3bn. And that comes with some serious downside risks.”These words sounded ominous for an industry that has, over the last decade, garnered revenues totalling $4.6tn, Tyler said.High oil prices, though they have softened lately, are among the “main reasons for our anaemic global profitability”, said Tyler. “We still expect an average of $110 a barrel. That will leave us with a fuel bill of $207bn ... accounting for a third of our costs. And political risks could easily push the price higher.”But the worst to come is the financial crisis in the eurozone. Any escalation of the problems in Europe could result in a continent-wide recession, he warned, adding that it would “drag the rest of the world and our (the airline industry’s) profits down.”Citing the collapse of some airlines this year, particularly Spanair and Malev, Tyler had even more grim forecasts. “The industry’s profitability is balancing on a knife’s edge. If the bottom line worsens by even the equivalent of 0.1% of revenue, our $3bn profit very quickly becomes a $3bn loss.”Revising the industry outlook for 2012, Iata said yesterday it expected profits of $3bn globally, compared to $7.9bn in 2011.Compared with its forecast in March, Iata said North and Latin American carriers were expected to see better prospects. But the outlook for Middle East, Europe and Asia Pacific airlines were downgraded. European losses are now estimated at $1.1bn, nearly double the previous forecast of $600mn. African carriers were forecast to fly a steady path.“Although airlines face the common challenges of high fuel prices and economic uncertainty, the regional picture is diverse. Carriers in the Americas are seeing improved prospects for 2012. The rest of the world is seeing reduced profitability,” Tyler said. “As for European airlines the business environment is deteriorating rapidly resulting in sizable losses.”Iata sees the Middle East carriers posting profits of $400mn, down from its forecast of $500mn in March, a “significant drop compared with 2011 when the region’s carriers returned a profit of $1bn.”Tyler, however, said Middle East carriers continue to lead the industry growth, though the weakness in Europe-originating traffic will damage long-haul routes.“Along with capturing long-haul passenger traffic through the Gulf hubs, they (the Middle East carriers) have been the beneficiary of the improvement in the cargo markets during the past six months”, Iata said.“Overall, capacity by the (Middle East) region’s carriers is expected to expand by 13.3%, behind the 14.1% growth in demand”, it added.Iata said the “risks to the forecast are primarily on the downside. While the forecast is built on the market’s expectation that the sovereign debt crisis in the eurozone will intensify, the risk of more severe economic weakness in the event of a broader eurozone banking crisis could easily wipe out the industry’s profits.”Similarly, it said, the recent fall in oil prices could easily reverse should the Iran nuclear dispute deteriorate, which will see fears of a disruption in oil supply resurface.However, on an optimistic note, Iata said the upside would be a calming of the eurozone crisis, though there is no immediate solution in sight. But the actions to provide more liquidity on a large scale and steps towards closer integration for Europe would give a modest boost to industry profitability, Iata said.