Iata Warns Airlines of Worsening Eurozone Crisis and Oil Price Rise Risks
The International Air Transport Association (Iata) has warned the aviation industry that Europe’s sovereign debt crisis will worsen and rising oil prices, coupled with political risk, could threaten to wipe out airlines’ profits over the coming year.
“The biggest and most immediate risk, however, is the crisis in the eurozone,” said Tony Tyler, director general at Iata during the Geneva-based group’s annual meeting.
“If it evolves into a banking crisis we could face a continent-wide recession dragging the rest of the world and our profits down. The industry’s profitability is balancing on a knife edge. If the bottom line worsens by even the equivalent of just 1 percent of revenue, our $3bn profit very quickly becomes a $3bn loss.”
Iata, which regularly issues forecasts for an industry many consider an international business barometer, maintained this year’s global airline profit forecast at $3bn, which is worth 0.5 percent of industry revenues, but the industry group said that despite the stable outlook European airlines could bear the brunt of profit loss.
“The rest of the world is seeing reduced profitability,” said Tyler. “For European carriers, the business environment is deteriorating rapidly resulting in sizable losses, stemming from the worsening debt crisis in Europe.”
While Iata noted that 2012 would be another challenging year and forecast revenues of $631bn, the high price of oil will be the reason for the meagre 0.5 percent net margin.
“[The $3bn profit and $631bn revenue] projection comes with some serious downside risks,” said Tyler. “The high price of oil is among the main reasons for our anaemic global profitability. Oil prices have softened slightly. But we still expect an average of $110 per barrel. That will leave us with a fuel bill of $207 billion-almost equal to the GDP of the Philippines or the Czech Republic. It will account for a third of our costs. And political risks could easily push the price higher.”
Turbulent Times Ahead
In 2012, many airlines forecast profit slumps over the next year on fuel price rises.
Europe’s largest low-cost airline Ryanair warned the market of a dramatic profit slump for the next year, despite beating analyst expectations with a 25 percent surge in profits for the 12 months leading up to 31 March 2012, only last month.
“Recession, austerity, currency concerns and lower fares at new and growing bases … will make it difficult to repeat this year’s record results,” said chief executive Michael O’Leary. ”Any increase in fares will only partially offset higher fuel costs.”
“There’s a poor environment, it’s the fourth year of this, and repeating [fare growth of] 16 percent is not going to happen,” added chief financial officer Howard Millar.
“Ryanair is not as worried about the fallout of Greece’s political crisis as the fact that the eurozone is suffering its fourth year of poor economic performance. Greece is very small for us. We would be more concerned about places like Spain, its high unemployment and plans to raise taxes.”