Air Transport World

A world turned down upside: record fuel prices threaten airline profit hopes for 2008.(WORLD AIRLINE REPORT)(Cover story)

AIRLINES GOT A GLIMPSE LAST YEAR OF A NEW WORLD IN which the hard work and heartbreak of the past seven years was rewarded with rising profits and a brighter future. Alas, like moses, they were denied entrance to their promised land, which turned out to belong not to them but to oil companies.



Instead, they are left to ponder, once again, what might have been. With the price of oil sitting at $135 per barrel at this writing, the world has turned upside down and IATA no longer expects the industry to make a collective profit in 2008 after earning an estimated $5.6 billion in 2007, its first profitable year since 2000. Rather, it forecasts that in aggregate carriers will lose $2.3 billion, assuming an average price of $106.50 per barrel. Should oil remain at $135, losses will total $6.1 billion. As recently as March, IATA anticipated a profit of $4.5 billion.

It is true that in the past, rising fuel costs did not necessarily translate into a torrent of red ink, but these are not ordinary times, not with oil up 40% between December and May and the financial sector in turmoil, having shot itself in the foot with subprime mortgage lending. As the US economy slows, traffic growth is doing likewise, particularly among higher-yield travelers. IATA data show that in March the number of passengers traveling on first and business class tickets adjusted for the movement of the Easter holiday and the leap year declined by 1%-2%, while underlying passenger traffic growth was 4% for the January-April period against industry forecasts of 6.2%. US consumer confidence hit a record low in May.

Yet, as DG and CEO Giovanni Bisignani pointed out at the association's 64th AGM in Istanbul last month, there are no easy answers to the present crisis. Airlines cannot possibly offset today's fuel prices by trimming a bit here and snipping a little there. Not when the fuel bill is expected to be $40 billion higher this year than in 2006. In 2000, the fuel bill for the entire industry was just $46 billion. This year, if fuel averages $106.50 per barrel, airlines will spend $176 billion to fill their tanks.


Besides, carriers have been cutting expenses. According to IATA, they reduced nonfuel unit costs by an average of 18% while improving fuel efficiency an average of 19% over the past six years. "There is no fat left" to cut, is how Bisignani characterized the dilemma. "To survive this crisis, even more massive changes will be needed quickly."

But where will this change come from? At the AGM, members unanimously approved a resolution calling for governments, airports and labor "to take immediate action to help the industry survive the growing financial crisis." Governments, however, show little inclination to move forward on the industry's pleas for elimination of "archaic rules" that prevent airlines from restructuring across borders and for stronger price regulation of monopoly suppliers. The manifold failings of BAA at London airports did not stop the UK CAA cents/gallon from acceding to an 86% price rise over the next five years, for example.

Nor are governments inclined to reverse or ease their determination to impose a new round of environmental-related charges. Carriers outside the EU may be up in arms over the decision to include them in the ETS, but the EU is not alone in its desire to make them pay for their carbon. Last month, the US Congress debated the Lieberman-Warner Climate Security Act, a proposed law to establish hard carbon caps for dozens of industries, including the transportation sector.


As written, the measure would have required airlines to purchase carbon permits via a built-in tax on jet fuel that they would pay--to oil companies. …

Log in to your account to read this article – and millions more.