IATA points to downturn in 2008

The International Air Transport Association (IATA) released a new industry financial forecast estimating a global industry profit of US$5.6 billion in 2007 falling to US$5.0 billion in 2008.

The outlook is unchanged for 2007 at US$5.6 billion. Higher oil prices (full-year average forecast of US$73 per barrel) were offset by strong traffic growth (5.9% for passenger traffic) and even stronger revenue growth of 8.4%.

IATA sharply revised downward its outlook for 2008 to US$5.0 billion from the previously forecast US$7.8 billion. The spike in fuel prices is expected to add US$14 billion to the industry fuel bill, driving it up to US$149 billion (based on an average price of US$78 per barrel). The broadening impact of the credit crunch is expected to slow revenue growth to 4.7% and traffic growth to 4.0%. Simultaneously, capacity expansion is expected to accelerate in 2008 with an increase in aircraft deliveries to 1,281 (up from 1,041 in 2007).

“The challenges get tougher in 2008. A favourable economic environment and effective efficiency measures helped mitigate the impact of high fuel prices and underpinned profitability improvements. With the credit crunch, that is changing. The peak of the business cycle is over and we are still US$190 billion in debt. So we could be heading for a downturn with little cash in the bank to cushion the fall,” said Giovanni Bisignani, IATA’s Director General and CEO.

- While leading in absolute profitability in both 2007 and 2008, North American carriers will see the largest fall in profitability from US$2.7 billion in 2007 to US$2.2 billion in 2008. With 35% of the fleet over 25 years old, the impact of high fuel prices is greater than in other regions. Moreover, the region is at the centre of the credit crunch.

- European and Asian carriers will see minor drops in profitability of US$100 million each to US$2.0 billion and US$600 million respectively. Robust traffic growth to and within Asia is expected to partially insulate carriers from the impact of the crunch.

- Middle East will remain stable at US$200 million supported by ambitious route expansion.

- Latin America is the only region to see profitability improve by US$100 million to breakeven in 2008. This is largely the result of industry re-structuring.

- Africa will be the only region reporting a loss—stable at losses of US$100 million last year and this.

“The common theme globally is the need for efficiency. IATA’s Simplifying the Business programme is delivering critical efficiencies from e-ticketing to e-freight. In 2008 IATA will launch three major initiatives that will cut costs and improve service,” said Bisignani.

Freight traffic

Freight growth continues to be sluggish, reflecting strong competition with sea shipping and uncertainty over the economic outlook for 2008:

o International freight demand growth slowed to 3.5% in November, down from 3.6% in October.

o Over the first 11 months of 2007 freight demand grew 3.9%, well below the 4.8% recorded over the same period in 2006.

“It’s a mixed picture,” said Bisignani. “The global economy ended 2007 on a surprisingly strong note. The November surge in passenger demand has been critical in combating high oil prices and helping airlines end 2007 with an industry profit of US$5.6 billion – the first since 2000. But against a backdrop of robust world trade, sluggish freight growth continued to be a disappointment.”

“We ring in 2008 with a warning bell. Passenger demand growth is expected to fall to 5.0%. And the expected increase in freight demand growth to 4.3% will only help us recover some of the ground lost against sea shipping. High oil prices and the impact of the credit crunch will see industry profitability slip to US$5.0 billion in 2008. Since 2001 efficiency gains have been impressive: 64% improvement in labour productivity, 25% reduction in sales and marketing unit costs and a 16% decrease in non-fuel unit costs. The challenge for 2008 will be much more of the same – efficiency everywhere,” said Bisignani.