The International Air Transport Association has revised its industry financial forecast for 2008 significantly downwards to a loss of US$2.3 billion. The forecast uses a consensus oil price of US$106.5 per barrel crude (Brent). This is a swing of US$6.8 billion from the previously forecasted industry profit of US$4.5 billion that was announced in March and based on an average oil price of US$86 per barrel (Brent).
“For every dollar that the price of fuel increases, our costs go up by US$1.6 billion,” said Giovanni Bisignani, IATA Director General and CEO at the Association’s 64th Annual General Meeting and World Air Transport Summit which opened today in Istanbul, Turkey. The industry’s total fuel bill in 2008 is expected to be US$176 billion (based on oil at US$106.5 per barrel) accounting for 34% of operating costs. This is US$40 billion more than the 2006 bill which was US$136 billion (29% of operating costs). In 2002, the bill was US$40 billion, equal to 13% of costs.
“We also need to take a reality check. Despite the consensus of experts on the oil price, today’s oil prices make the US$2.3 billion loss look optimistic. For every dollar that the oil price increases, we add US$1.6 billion to costs. If we see US$135 oil for the rest of the year, losses could be US$6.1 billion,” said Bisignani.
“The situation has changed dramatically in recent weeks. Oil skyrocketing above US$130 per barrel has brought us into uncharted territory. Add in the weakening global economy and this is yet another perfect storm,” said Bisignani.
“Oil is changing everything. There are no easy answers. In the last six years, airlines improved fuel efficiency by 19% and reduced non-fuel unit costs by 18%. There is no fat left. To survive this crisis, even more massive changes will be needed quickly. Air transport is a catalyst for US$3.5 trillion in business and 32 million jobs. This is an extraordinary crisis with the potential to re-shape the industry with impacts throughout the global economy. Governments, industry partners and labour must deliver change,” said Bisignani.
IATA is calling on governments, industry partners and labour to address the fuel crisis that is pushing airlines into the red. IATA forecasts a loss of US$2.3 billion for 2008 based on an average oil price of US$106.5 per barrel Brent crude. The association sounded a warning that this year’s loss could be even higher - potentially US$6.1 billion with an oil price at US$135 per barrel for rest of the year.
In the State of the Industry address at IATA’s 64th Annual General Meeting and World Air Transport Summit in Istanbul, Turkey, the association’s Director General and CEO, Giovanni Bisignani compared the airline industry to Sisyphus - a mythical character whose fate was to constantly carry heavy loads uphill.
“Over the last 60 years the industry made US$11.5 trillion in revenues, but only US$32 billion in profits. Average margin for the entire industry has been just 0.3%. And the industry is US$190 billion in debt. Since 2001, airlines achieved massive change. Fuel efficiency improved 19% and non-fuel unit costs dropped 18%. The skyrocketing price of oil has eaten these gains and left the industry in the red again. Oil prices at US$130 a barrel are changing the game for everyone. The situation is grim,” said Bisignani.
Bisignani sounded the alarm in a stark declaration to governments, industry partners and labour. “Airlines are struggling for survival and massive changes are needed. Governments must stop crazy taxation, change the rules of the game and fix the infrastructure. Labour must understand that jobs disappear if costs don’t come down. And to our partners, the message is simple. We are in this together. Don’t bite the hand that feeds you,” said Bisignani.
The greatest call for change was with governments. “Re-regulation or re-nationalisation is not the right answer. But it may be the only one unless we change the rules of the game. The Chicago Convention is not the problem. It’s the bilateral system that was designed for another age. The Freedoms of the Air are only restrictions on our business. Airlines cannot look beyond national borders to manage risk, access global capital or consolidate. To fight crises effectively, brands not flags must define our business,” said Bisignani.
“We must communicate clearly to governments the dimension of the oil crisis, the potential impact on the global economy if the air transport industry fails, the measures that airlines are taking to survive and the action we need from them. To achieve this, IATA is organising an Agenda for Freedom Summit in Istanbul in the fourth quarter of this year. The invitation is open to any country with the courage to change. Already 12 countries have agreed to participate,” said Bisignani.
“The Agenda for Freedom Summit will build on the pockets of progress on liberalisation that we see around the world and drive even bigger change to overcome the limits of the bilateral system, free airlines from national flags, secure financial stability and create global opportunities. It’s time to tear-up the 3,500 bilateral agreements and replace them with a clean sheet of paper without any reference to commercial regulation. Airlines would be free to innovate, compete, grow, become financially healthy or even disappear. Governments also have an important role: to ensure a level playing field and regulate safety, security and environmental performance,” said Bisignani.
Bisignani also called for change in three other key areas:
Security: “Security is an uncoordinated mess. Since 2001 airlines and their customers have paid over US$30 billion for security measures. For this we get more frustration than value. Passengers face a maze of duplication, bureaucracy and hassle. This must change,” said Bisignani. The IATA-led Simplifying Passenger Travel programme (www.spt.aero) points the way to effective, efficient and convenient security. “Now governments must do their part and focus on risk management, harmonise global standards, make better use of technology, and take responsibility for the bill,” said Bisignani.
Regulation of monopolies: Bisignani reported that IATA’s work achieved a record US$3.7 billion of cost savings in charges, fees and taxation. “But airport cost increases of US$1.5 billion show that still too many monopoly suppliers live happy days isolated from commercial discipline. Governments must deliver effective regulation of monopolies. That means delivering results on cost-efficiency and good service,” said Bisignani.
Environment: “The current fuel crisis must be a catalyst for governments to deliver results on environment that reduce fuel burn. Our vision for carbon neutral growth leading to a carbon-free future sets the benchmark. And we are driving progress with our four pillar strategy. In 2007, IATA Green Teams delivered 10.5 million tonnes of CO2 savings along with shortening 395 routes. But governments remain fixated on punitive economic measures such as the EU Emissions Trading Scheme. These are reckless decisions when the oil price could re-shape the industry. Governments must drive progress by taking politics out of air traffic management, acting globally on emissions trading and supporting positive economic measures to drive innovation,’’ said Bisignani.
Bisignani reported on two areas of solid progress:
Safety: “In 2007, 2.3 billion people and 44 million tonnes of cargo flew safely. But the accident rate took a step backwards from 0.65 hull losses per million flights in 2006 to 0.75 in 2007. We must work harder to make a safe industry even safer,” said Bisignani. He announced that all IATA members have completed the IATA Operational Safety Audit (IOSA). A total of 149 IATA member airlines are on the registry which now includes 206 airlines. “IATA is a quality association and IOSA is a condition of IATA membership. By the end of 2008, carriers must close all audit findings and be listed on the public registry (www.iata.org/registry) to retain membership,” said Bisignani. Twelve airlines have been terminated for not meeting the deadlines. “Our goal is to raise the bar on safety, not reduce our membership. IATA is investing US$8.2 million in Partnership for Safety programmes and flight data analysis to help members achieve the IOSA standards.”
Simplifying the Business: Bisignani reported that the industry achieved 100% e-ticketing on 1 June 2008. “Four years ago we had a vision to modernise our business with technology, improve convenience and save US$6.5 billion. Today that vision is a reality. E-freight operates at six locations, three more are about to start and we expect 14 by the end of the year. Bar coded boarding passes are being used by 135 airlines. And millions of passengers enjoy the convenience of Common Use Self Service check-in at 94 airports. But the star of the show is e-ticketing. Today we celebrate a great achievement. The paper ticket is history. Everyone can enjoy the convenience of e-ticketing everywhere. And we are saving US$3 billion annually,” said Bisignani.
“Airlines transport 2.3 billion passengers safely and efficiently. Over US$3.5 trillion of business and 32 million jobs depend on our success. We are in a crisis of enormous dimension. Change is the only way to survive this perfect storm, return to profitability and build a sustainable future,” concluded Bisignani.