Airlines face crisis as headwinds

Airline profits forecast to total $28 billion (Dh102.76 billion) in the three years through 2012 may be unsustainable as overcapacity and looming regulatory costs weigh on margins, the head of the Iata industry association said. Airlines will generate net income equal to 0.8 per cent of revenue next year, a margin that may shrink further if economic growth slows to less than 2.4 per cent, Tony Tyler, chief executive officer of the International Air Transport Association, said in an interview in London. "The natural condition of the airline industry is crisis," Tyler said. "Occasionally, we've had short periods where the conditions are quite benign and everything goes quite well, and the danger is to believe that's normal — and that's wrong." Iata's prediction for airline earnings to drop almost 30 per cent to $4.9 billion in 2012 may prove too optimistic should the global economy slow further, said Tyler, who was CEO at Cathay Pacific Airways, Asia's No 1 international carrier, for almost four years. The industry has lost money in seven of the past 10 years, even as sales doubled to almost $550 billion. Bankruptcy protection "We're assuming world economic growth will be just marginally down for next year," Tyler said in the interview in London. "If we're wrong with that then all bets are off." American Airlines parent AMR Corp on Monday tumbled the most since 2003, triggering automatic trading halts, on growing concern that the third-largest US carrier may be forced to seek bankruptcy protection. Deutsche Lufthansa AG, Europe's second-largest airline, last month scrapped its full-year profit forecast after August's results were worse than expected. Figures released on Monday show growth in passenger traffic at Iata's 230 member airlines slowed to 4.5 per cent in August from 6 per cent in July, including a 0.3 per cent slump in US domestic travel. Cargo demand, which is usually tracked by the passenger market, dropped 3.8 per cent in the month compared with a year earlier, more than double the pace of July's slide. "We are in a time now of declining profitability," Tyler said. "The latest traffic figures would reinforce this and possibly point to risks, if anything, being on the downside." The industry's precarious position is illustrated by a predicted net margin of just 1.2 per cent this year, even after seat occupancy reached 81 per cent in August and premium traffic rose 8.2 per cent over the first seven months, allowing many carriers to raise business fares, the CEO said. In addition to the global slowdown, airline profitability is being further jeopardised by the European Union's plans to include aviation in the world's largest cap-and-trade system for carbon dioxide emissions, Tyler said. Carbon costs The plan, due to be implemented in January, is "misguided" because it's not global and creates market distortions while infringing national sovereignty, Tyler said, citing opposition from countries including the US, China and India. Programme costs will amount to about $1.2 billion next year, Iata reckons, while estimates of the bill for the first decade of implementation range from $26 billion to as much as $85 billion — more than double the $36 billion in net income from the industry's three profitable years in the past decade. "Airlines will try to recover it," the executive said. "But it's naive to think they will." Biofuels, which are carbon neutral and currently undergoing tests with airlines including Lufthansa and Spain's Iberia, don't yet offer a practical substitute for kerosene, Tyler said. "We know it's technically feasible," he said. "The issue is commercializing it and producing biofuels in sufficient quantity to make an impact. But in due course there is no reason why they couldn't be an alternative to fossil fuels." Airlines are becoming "smarter" at hedging fuel expenses, which make up a third of operating costs, following the surge, collapse and rebound of oil in the past four years, the CEO said. Carriers sought to protect themselves in the first half of 2008 by using financial derivatives, only to be left paying more after crude tumbled during the global recession. Merger barrier "Many airlines got badly burned by the collapse of oil prices in 2008," said Tyler, adding that Cathay Pacific earnings were crimped by its fuel-buying policies during his term as CEO. "What many people are realizing is that this hedging activity isn't a clever way of buying fuel cheaper, it's a way of managing volatility." While the industry itself needs to do more to eliminate excess capacity and regain control of yields, a measure of revenue per passenger that has been shrinking for decades, political sensitivities about the importance of flag-carrier airlines remain an obstacle to mergers, Tyler said.