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Airline Loss Forecast Increases to $9 Billion

June 8, 2009 By: George Dooley

The International Air Transport Association (IATA) revised its airline financial forecast for 2009 to a global loss of $9 billion, nearly double the association’s March estimate of a $4.7 billion loss. This reflects a rapidly deteriorating revenue environment, IATA said. IATA also revised its loss estimate for 2008 to US$10.4 billion from the previous estimate of US$8.5 billion.

“There is no modern precedent for today’s economic meltdown. The ground has shifted. Our industry has been shaken. This is the most difficult situation that the industry has faced. After September 11, revenues fell by 7 percent. It took three years to recover lost ground, even on the back of a strong economy. This time we face a 15 percent drop—a loss of revenues of US$80 billion—in the middle of a global recession,” said Giovanni Bisignani, IATA’s director general and CEO in his State of the Industry address to 500 leaders gathered in Kuala Lumpur for the 65th IATA Annual General Meeting.

“Our future depends on a drastic reshaping by partners, governments and industry. We cannot bear the cost of government micro-regulation, crazy taxation and partners abusing their monopoly power,” said Bisignani.

North American carriers are expected to show a loss of $1 billion. This is significantly better than the $5.1 billion loss in 2008, IATA said. Limited hedging by U.S. carriers exposed the U.S. industry to rising fuel prices in 2008. This turned into an advantage in 2009 by giving U.S. carriers access to lower spot prices. Early capacity cuts are also helping. Carriers in all regions are expected to report losses in 2009.

Recession is the most significant factor impacting the industry’s bottom line. IATA’s revised forecast sees revenues declining an unprecedented 15 percent ($80 billion) from $528 billion in 2008 to $448 billion in 2009. Passenger demand is expected to contract by 8 percent to 2.06 billion travelers compared to 2.24 billion in 2008. The revenue impact of falling demand will be further exaggerated by large falls in yields—11 percent for cargo and 7 percent for passenger.

Bisignani noted risks and challenges:

*    Fuel bill: The industry fuel bill is forecast to decline by $59 billion to $106 billion in 2009. Fuel will account for 23 percent of operating costs with an average price of oil at $56 per barrel (Brent). By comparison, the 2008 fuel bill was $165 billion (31 percent of costs) at an average price of $99 per barrel. “The risk that we have seen in recent weeks is that even the slightest glimmer of economic hope sends oil prices higher. Greedy speculation must not hold the global economy hostage. Failure to act by governments would be irresponsible,” said Bisignani.

*    Efficiency gains: Over the last decade, labor productivity improved by 71 percent. Fuel efficiency increased by 20 percent and load factors rose by 7 percentage points. The dramatic downturn in demand could push non-fuel unit costs higher, which cannot be cut in proportion.
*    Stronger Cash Reserves: Cash reserves of $70 billion (13 percent) of revenues are much stronger than the 9 percent reserve that airlines had in 2000. Some of this is being funded by the $170 billion industry debt or by asset sales. “We are in a better cash position than when we faced the challenges of September 11. But our pockets are not that deep. A long L-shaped recovery could drain the industry of cash,” said Bisignani.
*    Careful Capacity Management: Global load factors for the first quarter of 2009 are down about 3 percentage points compared to the previous year. This is less than the falls experienced in some recent crises as a result of airlines better matching capacity to falling demand. Nonetheless, the 4,000 aircraft expected to enter the commercial aviation fleet in the next three years will make this an ongoing challenge.
*    Strong Partnerships: Consolidation within political borders (including Air France-KLM, Lufthansa-Swiss, Delta-Northwest, Cathay Pacific-Dragonair) has created stronger players. But archaic limitations on ownership continue to prevent broader consolidation and partnerships across borders.


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