(EnergyAsia, March 26 2012, Monday) — More airlines could fold up this year as the industry faces the bleak prospect of losing more than US$5 billion if fuel prices continue to rise beyond the present level with Brent crude hovering around US$125 a barrel, said the International Air Transport Association (IATA) and members.
Last December, IATA said the industry had forecast Brent oil prices to hold at US$99 a barrel for 2012. Instead, for the year-to-date, Brent has averaged nearly US$120, forcing the industry to raise consensus forecast for the year to US$115.
“This will push fuel to 34% of average operating costs and see the overall industry fuel bill rise to US$213 billion. Political tensions in the Gulf region increase the risk of significantly higher oil prices, the implications of which could put the industry into losses,” said IATA.
For now, citing rising oil prices in its latest forecast, the association downgraded the industry’s 2012 profit outlook by US$500 million from last December’s to US$3 billion based on a 0.5% margin that could be further eroded if oil prices rise further on supply disruptions or fear of military conflict in the Middle East.
IATA said the latest US$500 million downgrade from its last forecast just three months ago has been “primarily driven by a rise in the expected average price of oil to US$115 per barrel, up from the previously forecast US$99.”
IATA said it could have been forced to make a bigger downgrade if the Eurozone crisis had worsened and the US economy not improved in recent weeks.
Airline performance is closely tied to global GDP growth. Historically, when GDP growth drops below 2%, the global airline industry returns a collective loss.
“2012 continues to be a challenging year for airlines. The risk of a worsening Eurozone crisis has been replaced by an equally toxic risk—rising oil prices. Already the damage is being felt with a downgrade in industry profits to US$3 billion,’’ said Tony Tyler, IATA’s director general and CEO.
“With GDP growth projections now at 2% and an anaemic margin of 0.5%, it will not take much of a shock to push the industry into the red for 2012.”
IATA said an escalation of the crisis in Iran leading to a closure of the Strait of Hormuz and oil supply disruption could send Brent prices spiking to US$150 a barrel by mid-year, for a full year average of $135. In such a scenario, global GDP growth would fall to 1.7%, plunging the entire industry towards losses of over $5 billion.
“While we have seen some improvements in economic prospects any further significant rise in the fuel price will almost certainly turn weak profits into losses,” said Mr Tyler.
Earlier, IATA had revised upwards its estimated profits for 2011 to US$7.9 billion from the previously forecast US$6.9 billion. This was primarily owing to the much better than expected performance of Chinese carriers.
IATA expects the industry’s overall capacity (passenger and cargo combined) to grow by 3.2% in 2012 (based on announced schedules) which is behind the 3.6% expected expansion in demand. This is a reversal of the expectation in December of capacity expansion (3.1%) outstripping demand (2.9%).
Both passenger load factors and aircraft utilization have returned to or above pre-recession levels.
Passenger demand is expected to grow by 4.2% for 2012, which is 0.2 percentage points ahead of the December forecast.
IATA represents some 240 airlines which account for 84% of global air traffic.