Fasten seatbelts as profits plunge

PUBLISHED : Tuesday, 07 June, 2011, 12:00am
UPDATED : Tuesday, 07 June, 2011, 12:00am


Robust growth by Chinese and Indian airlines will help Asia-Pacific carriers cope with an expected slump in profitability among global airlines this year.

The International Air Transport Association, which represents about 230 airlines, forecast airlines would generate just US$4 billion in profit in 2011, a drop of 78 per cent from the estimated US$18 billion in net profits airlines earned last year.

Giovanni Bisignani, IATA director general and chief executive, said: 'We expect airlines to make just US$4 billion profits this year on revenues of US$598 billion.'

He added: 'The challenge is to prepare to handle 16 billion passengers and 400 million tonnes of cargo by 2050 with efficient infrastructure and effective technology, while making sustainable profits and satisfying customer needs.'

Giving a state of the industry speech at the IATA annual general meeting in Singapore yesterday, Bisignani said: 'Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations.'

But some delegates at the meeting suggested his profit forecast was overly optimistic after airlines reported total first quarter losses of US$2.2 billion. And there were concerns economic conditions in Europe and the North America could worsen.

Bisignani said Asian carriers were expected to earn net profits of US$2.1 billion this year, making them the most profitable of all the regions.

But this year's forecast is a dramatic slump compared with the US$10 billion profit Asia-Pacific airlines achieved in 2010. The region's airlines, which carry 40 per cent of international airfreight, were more exposed to fluctuations in the air cargo market, while fuel also accounted for a higher proportion of their operating costs than airlines elsewhere.

Asia-Pacific carriers would also continue to be adversely affected by the Japanese earthquake and tsunami and, while there were 'signs of a revival', IATA did not have a total estimate of revenue losses caused by the March 11 disaster.

The downturn in passenger and cargo traffic to and from Japan, would be more than offset by robust growth in both China and India, although mainland passenger volumes are set to fall from 13 per cent growth last year to 10 per cent in 2011.

Even so, Asia-Pacific is the only region where the 6.3 per cent rise in demand will outpace the 5.9 per cent growth in airline capacity.

Bisignani remained confident about medium-term prospects for China, despite this year's projected fall in demand. He expected there would be 360 million new passengers in Asia Pacific by 2014 with '210 million passengers in China alone'. He said the mainland had built 45 new airports in the last five years. 'China is planning another 52 by 2020,' he added.

As a result, Asia would be the biggest single aviation market by 2015. But he also reiterated that 'with size comes responsibility' and urged both the mainland and India to take a greater role in the decision-making processes in the global aviation industry. 'China and India will soon become driving forces of aviation in this century,' Bisignani added.

Pointing to challenges facing the global airline industry, Bisignani said higher fuel costs were the main cause of reduced profitability. IATA said the average oil price this year was expected to be US$110 per barrel for Brent crude, up 15 per cent compared with the previous forecast of US$96 per barrel. 'For each dollar increase in the average annual oil price, airlines face an additional US$1.6 billion in costs,' IATA said.

Bisignani went on to describe Britain, Germany and Austria as 'government tax bandits' because of their high passenger surcharges.

The Italian pointed out Britain's US$4.5 billion air passenger duty was the largest aviation tax in the world, while India had completely contravened International Civil Aviation Organisation rules by introducing a US$450 million service tax. 'The UK, Germany, Austria and India need a textbook on aviation's economic role. And the first chapter is Basta (enough) to more taxation,' he added.

Meanwhile, Tony Tyler, who is expected to take over from Bisignani as IATA director general and chief executive from July 1, looks like he will have to deal with calls for greater democracy. Yesterday's meeting saw smaller airlines, led by Qatar Airways, question the lack of detailed figures for executive salaries at IATA, corporate travel and expenditure on consultants.

They also criticised the lack of transparency over the way airline executives were elected to committees within IATA. Akbar al-Baker, chief executive of Qatar Airways, proposed committees be formed by airline representatives from each of IATA's six regions. Backing him, Gulf Air chief executive Samer Majali said: 'The winds of change blowing in the Middle East have arrived in Singapore.'