The International Air Transport Association announced that it expects airlines globally to lose US$2.2 billion in 2006 and to post profits of US$7.2 billion in 2007. The quarterly revision is a significant improvement on the previous forecast of a US$4.3 billion loss in 2006 and a profit of US$6 billion in 2007.
Giovanni Bisignani, IATA’s director General and CEO said, “There is a new optimism emerging in the industry. Improved economic prospects in Europe and Asia combined with an improving situation in the US will lead to reduced losses in 2006 and strengthened profitability in 2007. While the trend is positive, we are nowhere near sustainability. A profit of US$7.2 billion is only a 3% return on capital invested. Improved cost efficiency should be at the top of the agenda for everyone in the airline industry. At the same time, governments must get out the way of a hyper-competitive airline industry on commercial issues and take a much closer look at the efficiency of airport monopolies.” Bisignani announced the new forecast in a speech delivered at the Wings Club in New York.
The revised forecasts are based on crude oil prices of US$57 per barrel (Brent) in 2006 and US$52 per barrel in 2007. “Oil remains the single biggest challenge for airline profitability. Strong demand gives little hope of reduced prices this year. What is disappointing is the response of the oil industry. Instead of expanding refinery capacity, the oil companies plan to return a quarter of a trillion dollars to investors over the next two years. Airlines alone have contributed a US$14 billion to this windfall profit. It is time that governments stepped in to encourage investment in new refinery capacity along with research into alternative fuel sources,” said Bisignani.
North American carriers will cut their losses from US$10.8 billion in 2005 to US$ 5.4 billion in 2006. This is largely the result of a 3% reduction in domestic capacity that is giving US airlines increased pricing power in domestic markets. Significant capacity was re-deployed to international markets resulting in a 9% increase in international operations by North American carriers during 2005. “Restructuring in the US industry has produced some impressive results, including a 34% increase in productivity. None-the-less, at 33% of operating costs US labour costs are higher than their competitors in both Europe and Asia. More work needs to be done,” said Bisignani.
Asia-Pacific’s carriers will continue to post the largest absolute profits in the industry at US$2 billion. This is down from the US$2.9 billion posted in 2005. “Low labour costs and strong long-haul markets is their secret,” said Bisignani.
European carriers will follow a similar pattern with profitability reducing from US$1.8 billion in 2005 to US$1.4 billion in 2006. “Consolidation and strong fuel hedging programmes supported profitability. The higher price of fuel will hit them harder in 2006,” said Bisignani.
The emerging optimism in the industry is confirmed by the launch results of IATA’s Airline Business Confidence Index. Among Chief Financial Officers surveyed, 52.5% saw an improvement in profitability for the period November 2005-January 2006. For the 12-month period from February 2006, 69.5% of CFOs expected improving profitability.
Bisignani challenged governments to change in order to turn optimism into reality. “Airlines are delivering impressive results by improving efficiency. Governments must now step up to the plate with an agenda based on a common-sense approach to taxation, leadership for efficient security and liberalisation. It is critical that the US and Europe show leadership by moving forward with the proposed agreement on open skies and regulatory convergence as a step towards full liberalisation of markets and ownership. Air transport is a business like any other. Airlines need the freedom to: serve markets where they exist, consolidate when it makes business sense, compete efficiently with one set of global rules, generate profits and increase shareholder value. After 60 years, it is time to throw a nice retirement party for the bilateral system. The US and Europe must not be afraid to change. The age of liberalisation must begin,” said Bisignani.