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| Vietnam Airlines aircraft¡K.Asia Pacific carriers saw the largest decline of any region |
The outlook for the airline industry has changed dramatically since the International Air Transport Association (IATA) (iata.com) last forecast three months' previously. According to IATA's Industry Financial Forecast published December 2008, following the near collapse of the banking system, the deepest recession since the early1980s is now expected in 2009. The recession now means that passenger traffic is forecast to fall 3%, cargo to fall 5% and revenues to fall by over 6% in 2009 producing an extremely challenging revenue environment for the industry.
Deep recession and the most challenging revenue environment for 50 years will lead to larger losses during 2009 in all regions except the US. In both Europe and Asia, IATA said it expects losses of US$1 billion or more. The exception is the US where low hedging, leading to the full benefits of low fuel prices, and early substantial capacity cuts will lead to a counter-cyclical return to profit, albeit small.
Profitability has deteriorated very sharply during 2008 as the spot price of jet fuel rose from $90 barrel in January to peak at $180 a barrel in July, leading to a $38 billion rise in the industry's fuel bill for the year as a whole. Hedging limited, or rather delayed, the damage from the surge in energy costs in many regions. However, US airlines were almost fully exposed to the rise in spot prices. Moreover, the end-2007 collapse in the US housing market and the resulting credit crunch had caused the confidence of US consumers and travelers to slump early this year.
As a result the bulk of losses at the operating and net post-tax levels have occurred in the US industry. Nevertheless, airlines in other regions have not escaped the spike in fuel prices nor the onset of recession from the second quarter. Both Japan and Europe were in recession during both Q2 and Q3 this year. Both of these regions saw previously robust airline profits slip into loss during the first three months of this year.
Forecast highlights are:
- Industry revenues are expected to decline to US$501 billion. This a fall of US$35 billion from the US$536 billion in revenues forecasted for 2008. This drop in revenues is the first since the two consecutive years of decline in 2001 and 2002.
- Yields will decline by 3.0% (5.3% when adjusted for exchange rates and inflation).
- Passenger traffic is expected to decline by 3% following growth of 2% in 2008. This is the first decline in passenger traffic since the 2.7% drop in 2001.
- Cargo traffic is expected to decline by 5%, following a drop of 1.5% in 2008. Prior to 2008 the last time that cargo declined was in 2001 when a 6% drop was recorded.
- The 2009 oil price is expected to average US$60 per barrel (Brent) for a total bill of US$142 billion. This is US$32 billion lower than in 2008 when oil averaged US$100 per barrel (Brent).
"The outlook is bleak. The chronic industry crisis will continue into 2009 with US$2.5 billion in losses. We face the worst revenue environment in 50 years,"said Giovanni Bisignani, IATA's Director General and CEO.
IATA also updated its forecast for 2008 to a loss of US$5.0 billion. This is slightly improved from the US$5.2 billion loss projected in the Association's September forecast primarily as a result of the rapid decline in fuel prices.
Asia-Pacific carriers will see losses more than double from the US$500 million in 2008 to US$1.1 billion in 2009. With 45% of the global cargo market, the region's carriers will be disproportionately impacted by the expected 5% drop in global cargo markets next year. The region's largest market-Japan-is already in recession, said IATA. And its two main growth markets-China and India-are expected to deliver a major shift in performance. Chinese growth will slow as a result of the drop-off in exports. India's carriers, which are already struggling with high taxes and insufficient infrastructure, can expect a drop in demand following on from the tragic terror incidents in November.
Losses for European carriers will increase ten-fold to US$1 billion. Europe's main economies are already in recession. Hedging has locked in high fuel prices for many of the region's carriers in US dollar terms, and the weakened Euro is exaggerating the impact.
Middle Eastern airlines will see losses double to US$200 million. The challenge for the region will be to match capacity to demand as fleets expand and traffic slows - particularly for long-haul connections.
