Aviation flies into storm clouds

The global airline industry is on a knife-edge, with profits threatened by volatile fuel costs and the European financial crisis, says the IATA.

Tony Tyler addresses the annual general meeting of the International Air Transport Association in Beijing yesterday. Jason Lee / Reuters

The global airline industry is on a knife-edge, with profits threatened by volatile fuel costs and the European financial crisis.

Even above-average performing Middle East carriers will fail to meet predictions for this year as the industry continues to operate on the narrowest of margins according to its trade body, the International Air Transport Association (Iata).

Iata's annual general meeting, which opened in Beijing yesterday, heard profits in the frequently volatile and fiercely competitive airline industry have about halved after peaking at US$15.8 billion (Dh58.03bn) in 2010. Last year they stood at $7.9bn.

The meeting also heard industry leaders call for governments worldwide to recognise the importance of aviation to the global economy by easing up on its burden of regulation and taxes.

Tony Tyler, the Iata director general, told the meeting the aviation industry was "fragile" despite working hard to improve competitiveness.

"This will be another challenging year," he said. "We expect revenues of $631bn but a profit of just $3bn. That's a 0.5 per cent net margin. And that projection comes with some serious downside risks.

"The biggest and most immediate risk is the crisis in the euro zone. If it evolves into a banking crisis we could face a continent-wide recession, dragging the rest of the world and our profits down. The industry's profitability is balancing on a knife-edge. If the bottom line worsens by even the equivalent of just 1 per cent of revenue, our $3bn profit very quickly becomes a $3bn loss."

Iata's revised industry outlook for this year showed Middle East carriers are expected to post profits of $400 million, down from March's prediction of $500m, a significant drop from last year, when they posted profits totalling $1bn. However, it was more optimistic on growth.

"Middle East airlines continue to lead industry growth," the outlook noted. "Overall capacity by the region's carriers is expected to expand by 13.3 per cent, driven by 14.1 per cent growth in demand."

Mr Tyler told the meeting the price of oil had softened since the last outlook in March when the consensus was an average $115 per barrel for the year.

"But recently it is trading just below $100. The consensus is now for an average price of $110 for the year," he said.

"Even with oil at $110/barrel, fuel will consume 33 per cent of operating costs. Only 10 years ago this cost was in the 13 to 14 per cent range. Fuel price is a challenge with very little predictability. The reason that fuel prices have softened is the expectation of continued weak economic performance - primarily in Europe, where the sovereign debt crisis continues to deepen.

"The good news is that people are travelling. Despite the economic uncertainty, April passenger traffic was up 6.1 per cent. Even cargo has seen a 2 per cent volume improvement since November, most of which was captured by the Middle East airlines," Mr Tyler said.

"European carriers are at the centre of the economic uncertainty and suffer from governments that are eager to tax and over-regulate but are largely unable or unwilling to build airport capacity or deliver the much-needed Single European Sky. They are expected to lose $1.1bn," he added.

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