Growth in air passenger traffic will slow next year and the high price of oil will continue to kill airline profitability, that’s according to the airline industry’s trade group IATA.In 2006 the industry will see losses reduce to US$4.3 billion and the airline industry might even make money in 2007.
These are just some of the conclusions Givanni Bisignani, Director General of the International Air Transport Association (IATA) gave at the organisations second annual globa press briefing. Full transcript below:
Air transport is a key industry for the global economy. We are responsible for:
—8% of global GNP
—29 million jobs and
—Nearly US$3 trillion in economic activity
It is no secret that we are going through the worst crisis in our history. In the last years airlines faced enormous challenges. There are some great stories to be told. And there is much more that needs to be done to rebuild a key engine of global growth. Brian has just explained the numbers. US$6 billion in losses for 2005. And US$42 in cumulative losses since 2001. The situation for 2006 will see losses reduce to US$4.3 billion. And we might even make money in 2007. This is good news—the color of the numbers will finally be black.
But let’s also remember that a projected profit in 2007 of US$6 billion would be a 1.5% profit margin. It does not cover the cost of capital. And it certainly will not get investors very interested in air transport. What else are these numbers telling us?
Let me begin by highlighting some areas that Brian raised:
First: airlines are reducing costs.
One way to measure airline efficiency is by the price of crude at which airlines can break even. The break-even price for crude went from US$22 per barrel in 2003 to US$34 in 2004 to US$48 in 2005. In 2006 we expect to break-even at US$50. But it is not until 2007 that we see a profitable break-even price of US$55. Airlines are re-inventing themselves by cutting costs.
Second: regional differences are enormous.
North American carriers will lose US$10 billion this year and US$6.5 billion in 2006.
—Special restructuring costs are hitting the bottom line badly
European Carriers will post a US$1.3 billion profit for 2005.
—This will reduce to US$ 500 million in 2006 as hedging will provide less protection from fuel prices.
Asian carriers will increase their US$1.5 billion profit this year to US$2 billion in 2006.
Why these differences? Look at labour as a percentage of operating costs.
—38% in the US
—30% in Europe
—20% in Asia
The relationship to profitability is not by chance. Take a look at low cost penetration.
—45% in the US
—35% in Europe
—6% in Asia
Again the relationship to profitability is striking.
Third: The revenue situation will get worse.
The peak of the business cycle is over. We are not predicting recession. But the high price of oil will certainly slow production. We are already seeing slower growth for passenger traffic. We expect passenger traffic to drop from 7.1% this year to 4.5% in 2006.
Fourth: On top of the business cycle, the business is vulnerable to shocks.
The last years have been characterised by crisis - SARS, war and terror. And the high price of oil continues to kill our profitability. Fortunately, airlines are resilient. Avian flu is another potential shock if we see human-to-human transmission. At this point that is not the case. Based on our experience with SARS, we are coordinating with WHO. We have issued industry best practices for front-line staff. And we are prepared to act if the situation becomes more serious.
There are two conclusions.
First the industry is putting its house in order:
Non-fuel units costs are down some 14% since 2001. Labor productivity has improved by 32%.
Second, the industry is running at different speeds.
The US will continue to take enormous losses to restructure. The challenge for Europe and Asia is to keep reducing costs. Africa’s challenge is safety. And Middle East carriers must carefully manage rapid traffic and capacity growth. China’s infrastructure expansion is facilitating double digit growth. India’s carriers are expanding much faster than infrastructure investment. Low cost competition is a fact of life almost everywhere. And passengers will continue to demand cheaper air travel.
We are on approach to recovery. But, like a plane landing, this is the most critical stage.
What are the risk factors? And what is IATA’s role?
An industry in crisis needs a strong association to take leadership.
I joined IATA in 2002—the peak of the industry’s crisis. IATA has always been a well-respected organization. Over 60 years we developed the standards that built a global industry. But the situation in 2002 needed change—drastic and fast. First we built a new team with different skills and speed.
—60% of the staff changed
—and 70% of the management team is new
Second, the new IATA had to lead the industry towards a future as a low cost industry.
—The industry is changing quickly.
—Our goal is to deliver results even faster.
We have a broad agenda for change that begins at home with:
—Simplifying the Business
We need our partners—airports and air navigation service providers—to bring cost savings to the table.
And we have some demands of Governments on:
—Efficient Infrastructure and an environment policy that is positive not punitive
—Greater Freedom to do Business
—A coordinated approach to security
—And a sane taxation policy
Let me discuss each separately.
Safety is our industry’s number one priority. 2004 was our safest year ever. But August-September 2005 was among our worst periods ever. None-the-less we are the safest mode of transport. The accident rate for 2004 was 0.78 per million sectors. We are committed achieving 0.65 next year across the board. Meanwhile, IATA members have already achieved 0.57. The IATA Operational Safety Audit (IOSA) is a key tool to move the entire industry forward. This is the first global standard for airline safety management. Mike will discuss this with you later. But let me highlight some key recent achievements.
First, the audit is a recognised industry benchmark.
—140 airlines will be in the audit process by the end of this year
—That is 70% of international scheduled traffic
Second, resources are growing.
—IATA provides the standards free to any commercial airline
—We have 7 accredited audit organisations that make up a competitive commercial environment
—The quality control process is now ISO certified
—Our partnership for safety programme will assist airlines in developing countries to get on board
Third, governments are using the audit in new ways.
—The FAA accepts IOSA audits for codeshare arrangements
—We are helping Egypt, Jordan and Chile to incorporate IOSA into their airline certification process
—We do not believe that blacklists move the industry forward on safety
—But recognising that they are a political necessity, we are promoting IOSA as a transparent tool
Fourth—and most important—IOSA will become a condition of IATA membership.
—Our Board on Friday last week decided that all IATA airlines must contract for an audit by the end of 2006
—And they must be audited by the end of 2007 to keep membership
—This is a giant step for IOSA
—The registry is online—transparent for all to see
—And it adds another dimension of quality to IATA membership
Simplifying the [email protected]