Airlines again face soaring oil prices

The recovery in air travel demand looks increasingly convincing. Cargo volumes are continuing to grow. It must be time for something new to worry about: how about oil prices? True, it’s not all that long ago that the industry last had to deal with peak oil – July of 2008, in fact, when oil hit an all-time high of US$145 a barrel. By December of that year, the price had dropped down to just over US$30 a barrel, trading between US$35 and US$82 a barrel throughout 2009, as the global economy languished in recession.

4th Apr 2011


Viewpoint

 Airlines again face soaring oil prices


The recovery in air travel demand looks increasingly convincing. Cargo volumes are continuing to grow. It must be time for something new to worry about: how about oil prices?
True, it’s not all that long ago that the industry last had to deal with peak oil – July of 2008, in fact, when oil hit an all-time high of US$145 a barrel. By December of that year, the price had dropped down to just over US$30 a barrel, trading between US$35 and US$82 a barrel throughout 2009, as the global economy languished in recession.
But now, with unrest erupting all over the Middle East and a UN-mandated no-fly zone being imposed over Libya, now in the throes of civil war, oil prices are skyrocketing again. On 31 January, the Brent crude oil price hit US$100 a barrel for the first time since October 2008, on concern about the escalating unrest in Egypt.
According to energy information provider Platts, the refinery price of jet fuel stood at US$134.4 a barrel as of 8 March – up 1.6 percent from a week earlier, 12.3 percent from a month earlier, and as much as 49.4 percent from a year ago.
As reported in this issue, Malaysia Airlines (MAS) has blamed oil prices for its 52 percent drop in annual profit for 2010. And now the International Air Transport Association (IATA) has downgraded its industry-wide 2011 profit forecast for the same reason.
IATA has downgraded its profit outlook to US$8.6 billion from its previous US$9.1 billion estimate, announced in December 2010. That represents a 46 percent drop in net profit compared with the US$16 billion earned by the industry last year. With expected industry revenue of US$594 billion, the profit is equivalent to a net profit margin of 1.4 percent.
“Political unrest in the Middle East has sent oil over US$100 per barrel. That is significantly higher than the US$84 per barrel that was the assumption in December,” notes Giovanni Bisignani, IATA’s director general and chief executive officer. “At the same time, the global economy is now forecast to grow 3.1 percent this year – a full 0.5 percentage point better than predicted just three months ago.”
But, he adds, stronger revenues will provide only a partial offset to higher costs. Profits will halve compared with last year and margins will be “pathetic”.
IATA has now raised its 2011 average oil price assumption to US$96 per barrel of Brent crude (up from December’s US$84 per barrel), in line with market forecasts. Including the impact of fuel hedging, which is roughly 50 percent of expected consumption, this will increase the industry fuel bill by US$10 billion, to a total of US$166 billion.
Compared with 2010, oil prices are now expected to be 20 percent higher this year, bringing fuel to 29 percent of total airline operating costs (up from 26 percent in 2010).
Expanding economies mean that airlines have the opportunity to recover some of these added costs with additional revenue. For example, since early 2009, rising oil prices added 25 percent to unit costs while average fares (excluding surcharges) rose 20 percent. But this year, IATA says higher revenues are not expected to be sufficient to prevent the rise in oil prices from causing profits to shrink dramatically.
On an upbeat note for the region, Asia-Pacific carriers are expected to deliver the largest collective profit of US$3.7 billion and the highest operating margins of 4.6 percent. Even so, this substantially lower than the US$7.6 billion that the region’s carriers made in 2010 and from the previously forecast US$4.6 billion for 2011.
While the strong economic growth in the region is still driving profitability, anti-inflationary measures in China are slowing trade and air cargo demand. IATA notes that the Asia-Pacific region is more exposed to higher fuel prices, due to relatively low levels of hedging.

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Asian Aviation at a glance