Iata chief demands regional airspace overhaul as the losses mount
The International Air Transport Association (Iata), aviation's de facto governing body, next month will increase its outlook for industry losses this year largely on higher fuel costs.
The new figures will bring further pressure for an overhaul in how authorities in the Pearl River Delta region handle their airspace.
It will be Iata's third upward shift this year, which speaks volumes about the volatile nature of the industry; even the experts have a hard time getting it right.
In June, Iata forecast industry losses of US$3 billion this year based on US$66 as the average trading price for a barrel of Brent crude.
The breakeven price for the industry is US$50 a barrel. The average price so far this year has been US$68.27, so losses will mount, according to Iata's top executive, Giovanni Bisignani (pictured).
Iata's projections for losses 'will increase because we are seeing fuel bills higher than anticipated,' Mr Bisignani said.
The good news is that Iata's prognosticators were wrong in other areas too, some of which should at least have a positive impact on the carrier's bottom lines.
Airlines' load factors - the proportion of available seats they sell - are higher than expected thanks to strong demand and better attention to capacity management.
Carriers have also bought stronger fuel-hedging positions than was anticipated with jet kerosene prices so high, lowering their exposure to the upward trend.
Iata expected airlines to hedge on average 42 per cent of their fuel needs this year; it now looks like that proportion will be closer to 50 per cent.
'Last year it was higher, but hedging at these levels scares people,' Mr Bisignani said.
Industry yields - average earnings per kilometre flown - have also beaten expectations due to higher than expected demand for premium-class travel.
The problem is that premium-class travel, which has undergone a sustained period of growth over the past 18 months to account for 15 per cent of current demand on long-haul routes, is skittish.
It depends heavily on increasingly nervous US corporates, which have one eye on the Middle East and the other on Wall Street, and it remains to be seen if robust commercial activity in Europe and Asia can offset the impact of a slowdown in the US economy.
Iata's number-crunchers are trying to understand how much the positive surprises this year will mitigate the impact of the inexorable rise of jet fuel.
One thing we know is that American carriers are on track to lose another US$5 billion this year, half of what they lost last year.
For the past two years, economists have struggled to figure out how high the price for a barrel of oil can go before it triggers a global slowdown. Those that predicted that US$50 barrels would start the slide have returned to their abacuses.
Consensus now is that a slowdown will start at US$80 to US$85 a barrel. If that happens, airlines will still be facing escalating operating costs, but their yields will shrink and they will no longer have the shield of 6.5 per cent growth in passenger numbers.
What is certain is there is not much else the carriers can do to counter the price of fuel.
Which is why Iata has turned to the skies for answers.
Mr Bisignani said inefficient air traffic control systems were the top priority for Iata simply because they hold the most promise for savings.
Nowhere is that more true than in the Pearl River Delta, where a lack of centralised air traffic control results in flights into the region being 20 minutes longer than is necessary, costing airlines US$300 million a year in fuel.
Civil aviation departments on both sides of the border have been trying to hammer out an agreement.
But, predictably, the authorities have been reluctant to cede control of their airspace, even for the greater good.
It appears any agreement still remains a long way off and, with fuel prices rising with each day, time is of the essence for an industry whose options to cut costs are dwindling.
'We appreciate all the efforts the local organisations are making [to resolve the airspace issue in the Pearl River Delta],' Mr Bisignani said.
'But when I see target dates of 2010, I say it's too much. We have to be fast in achieving this.'