Region's airlines to lose $1.5bn as economic meltdown continues

The International Air Transport Association (IATA) has revised its global forecast of losses for the industry to $9 billion for 2009. Nearly double its March estimate of $4.7bn.

For the Middle East, despite strong traffic growth, IATA predicts losses will deepen to $1.5bn citing that the region’s intercontinental hubs are vulnerable to recessionary impacts in both European and Asian source markets.

“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%. It took three years to recover lost ground, even on the back of a strong economy. This time we face a 15% drop—a loss of revenues of US$80 billion—in the middle of a global recession. 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 Giovanni Bisignani, IATA’s Director General and CEO in his State of the Industry address to 500 of the industry’s top leaders gathered in Kuala Lumpur for the 65th IATA Annual General Meeting and World Air Transport Summit

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Giovanni Bisignani, IATA Director General and CEO

Picture credit: Tom Gordon Photography

Recession is the most significant factor impacting the industry’s bottom line and IATA’s revised forecast sees revenues declining an unprecedented 15% (US$80bn) from US$528bn in 2008 to US$448bn in 2009.

Air cargo demand is expected to decline by 17%. In 2009, airlines are forecast to carry 33.3 million tonnes of freight, compared to 40.1 million tonnes in 2008. Passenger demand is expected to contract by 8% to 2.06bn travellers compared to 2.24bn in 2008. The revenue impact of falling demand will be further exaggerated by large falls in yields—11% for cargo and 7% for passenger, the association said.

Bisignani explained that the global industry fuel bill is forecast to decline by US$59bn to US$106bn in 2009. Fuel will account for 23% of operating costs with an average price of oil at US$56 per barrel (Brent). By comparison, the 2008 fuel bill was US$165 billion (31% of costs) at an average price of US$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,” Bisignani said.

He also cited efficiency gains affecting the forecast. He said that over the last decade, labour productivity improved by 71%. Fuel efficiency increased by 20% 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.

While he also said that stronger cash reserves of US$70bn (13%) of revenues are much stronger than the 9% reserve that airlines had in 2000. Some of this is being funded by the US$170bn 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,” he said.

He added that careful capacity management would also play a part. He said global load factors for the first quarter of 2009 are down about 3 percentage points compared to the previous year. And that 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.

He also cited consolidation within political borders as a challenge (including Air France-KLM, Lufthansa-Swiss, Delta-Northwest, Cathay Pacific-Dragonair) and that this has created stronger players. But archaic limitations on ownership continue to prevent broader consolidation and partnerships across borders, he said.