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IATA Forecasts Grim Airline Losses of $11 Billion for 2009September 16, 2009 By: George Dooley
The International Air Transport Association (IATA) revised its global financial forecast predicting airline losses totaling $11 billion in 2009. This is $2 billion worse than the previously projected $9 billion loss due to rising fuel prices and exceptionally weak yields. Industry revenues for the year are expected to fall by $80 billion (15 percent) to $455 billion compared with 2008 levels, IATA said.
“The bottom line of this crisis - with combined 08-09 losses at $27.8 billion - is larger than the impact of 9/11,” said Giovanni Bisignani, IATA’s director general and CEO. Industry losses for 2001-2002 were US$24.3 billion.
“This is not a short-term shock. $80 billion will disappear from the industry’s top line," Bisignani continued. "That 15 percent of lost revenue will take years to recover. Conserving cash, careful capacity management and cutting costs are the keys to survival. The global economic storm may be abating, but airlines have not yet found safe harbor. The crisis continues.”
IATA also revised its loss estimates for 2008 from a loss of $10.4 billion to a loss of $16.8 billion. This revision reflects restatements and clarification of the accounting treatment of very large revaluations to goodwill and fuel hedges. IATA industry profit figures strip-out such extra-ordinary items which are not realized in cash terms.
IATA expects losses to continue into 2010 with the industry expected to report a $3.8 billion net loss. This is based on a limited revival of growth in traffic volumes of 3.2 percent for passenger and 5 percent for cargo; very little increase in yields of 1.1 percent for passenger and 0.9 percent for cargo and oil at $72 per barrel.
Three main factors are driving the expected losses, IATA says:
* Demand: Passenger traffic is expected to decline by 4 percent and cargo by 14 percent for 2009 (compared to declines of 8 percent and 17 percent respectively in the June forecast). By July, cargo demand was -11.3 percent and passenger demand was -2.9 percent. While both are improvements over the lows of -23.2 percent for cargo (January) and -11.1 percent for passenger (March), both markets remain weak.
* Yield: Yields are expected to fall 12 percent for passenger and 15 percent for cargo, compared to declines of 7 percent and 11 percent respectively in the June forecast. The fall in passenger yield is led by the 20 percent drop in demand for premium travel. Cargo utilization remains at less than 50 percent despite the removal of 227 freighters from the global fleet. There is little hope for an early recovery in yields in either the passenger or cargo markets.
* Fuel: Spot oil prices have been driven up sharply in anticipation of improved economic conditions. Oil is now expected to average $61 per barrel (Brent) for the year (up from $56 per barrel in the June forecast). This will add US$9 billion in cost for a total expected fuel bill of $115 billion.
“The optimism in the global economy has seen passenger and freight volumes rise, but that is the only bright spot. Rising costs and falling yields have squeezed airline cash flows," Bisignani said. "The sharp decline in yields will leave a lasting mark on the industry’s structure. And revenues are not likely to return to 2008 levels until 2012 at the earliest. With cash flows substantially down over the first half of the year, the situation is critical. Larger carriers have built-up cash reserves of US$15 billion - a war chest that is warding off a major cash crisis. But the outlook for small and medium sized carriers - with limited options to raise cash - is much more severe."
North American carriers are expected to post losses of $2.6 billion, more than double the previously forecast loss of $1 billion. Early resizing of capacity matched the slump in demand. But yields remain weak and recovery in travel demand is being held back by high levels of debt and unemployment.
“This is not an airline-only crisis," said Bisignani. "There is less cash coming into the industry and the entire value chain must be prepared for change. All our business partners - including airports, air navigation service providers, global distribution systems - must be prepared to cut costs and improve efficiencies. Some airports have delivered cost reductions, but not in line with the magnitude of the changes to the industry cash flow."