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Deep recession, bigger losses: IATA

The International Air Transport Association (IATA) announced a revised outlook for the global air transport industry with losses of USD 4.7 billion in 2009. This is significantly worse than IATA’s December 2008 forecast for a USD 2.5 billion loss in 2009, reflecting the rapid deterioration of the global economic conditions. Industry revenues are expected to fall by 12.0 per cent (USD 62 billion) to USD 467 billion. By comparison, the previous revenue decline, after the events of September 11, 2001, saw industry revenues fall by USD 23 billion over the period of 2000 to 2002 (approximately seven per cent).

“The state of the airline industry today is grim. Demand has deteriorated much more rapidly with the economic slowdown than could have been anticipated even a few months ago. Our loss forecast for 2009 is now USD 4.7 billion. Combined with an industry debt of USD 170 billion, the pressure on the industry balance sheet is extreme,” said Giovanni Bisignani, Director General and CEO, IATA. Demand is projected to fall sharply with passenger traffic expected to contract by 5.7 per cent over the year. Revenue implications of this fall will be exaggerated by an even sharper fall in premium traffic. Cargo demand is expected to decline by 13 per cent. Both are significantly worse than the December forecast of a three per cent drop in passenger demand and a five per cent fall in cargo demand. Yields are expected to drop by 4.3 per cent..

Falling fuel prices are helping to curb even larger losses. With an expected fuel price of USD 50 per barrel (Brent oil), the industry’s fuel bill is expected to drop to 25 per cent of operating costs (compared to 32 per cent in 2008 when oil averaged USD 99 per barrel). Combined with lower demand, total expenditure on fuel will fall to USD 116 billion (compared to USD 168 billion in 2008).

“Fuel is the only good news. But the relief of lower fuel prices is overshadowed by falling demand and plummeting revenues. The industry is in intensive care. Airlines face two immediate fundamental challenges: conserving cash and carefully matching capacity to demand,” said Bisignani.

IATA also revised its forecast losses for 2008 from USD five billion to USD 8.5 billion. The fourth quarter of 2008 was particularly difficult as carriers reported large hedging-related losses and a very sharp fall in premium travel and cargo traffic.

Regional differences remain significant:
Asia Pacific: Carriers in this region continue to be hardest hit by the current economic turmoil and are expected to post losses of USD 1.7 billion (significantly worse than the previous loss forecast of USD 1.1 billion). Japan, the region’s largest market is expected to see GDP drop by 5.5 per cent in 2009 with exports already in freefall. China has been successful in stimulating demand in domestic markets with pricing adjustments. International demand to and from China is expected to contract by between five per cent and ten per cent over the year. India, whose market for international air services tripled in size between 2000 and 2008, is expected to see capacity increase by 0.7 per cent in 2009, while demand drops between two per cent and three per cent. Overall, the region is expected to see a 6.8 per cent fall in demand but only a four per cent drop in capacity.

North America: Carriers in this region are expected to deliver the best performance for 2009 with a combined USD 100 million profit. A 7.5 per cent fall in demand is expected to be matched by a 7.5 per cent cut in capacity. Despite the worsening economic conditions, this is relatively unchanged from the earlier forecast of a USD 300 million profit. Carriers are benefiting from careful capacity management and lower spot prices for fuel.

Europe: Europe’s carriers are expected to lose US$1 billion in 2009. A forecast 2.9 per cent fall in the continent’s GDP is expected to result in a drop in demand of 6.5 per cent. Capacity cuts of 5.3 per cent will not keep pace with the fall in demand, driving yields and profitability down.

Latin America: While Latin America is forecast to maintain positive GDP growth in 2009, the collapse in demand for commodity products is expected to see traffic plunge by 7.8 per cent. Carriers are only expected to be able to drop capacity by 3.8 per cent resulting in losses of USD 600 million.

Africa: African carriers are expected to produce 2009 losses of USD 600 million. This is six times the USD 100 million lost in 2008. The continent’s carriers are losing market share on long-haul routes. Demand is expected to drop by 7.8 per cent with only a six per cent fall in capacity.

Middle East: Middle East will be the only region with demand growth in 2009 (+1.2 per cent). But this will be overshadowed by the impact of a 3.8 per cent increase in capacity. While this is significantly below the double-digit growth of previous years, the region continues to add capacity ahead of demand. The result is expected to be a loss of USD 900 million (a slight deterioration from the USD 800 million loss recorded in 2008).

Looking ahead
Much of the deterioration forecast for 2009 had already happened by January 2009. As manufacturers end their de-stocking there should be a modest bounce in air freight as component shipping rises a little. But weak consumer and business confidence is expected to keep spending and demand for air transport low. “The prospects for airlines are dependant on economic recovery. There is little to indicate an early end to the downturn. It will be a grim 2009. And while prospects may improve towards the end of the year, expecting a significant recovery in 2010 would require more optimism than realism,” said Bisignani.

Bisignani also cautioned that this crisis must bring change. “Recovery will not come without change. There is no doubt that this is a resilient industry capable of catalysing economic growth. But we are structurally sick. The historical margin of this hyper-fragmented industry is 0.3 per cent. Bail-outs are not the prescription to return to health. Access to global capital, the ability to merge and consolidate and the freedom to access markets are needed to run this industry as normal profitable business. This is IATA’s Agenda for Freedom—and a very cost effective solution for governments desperate to stimulate their economies,” said Bisignani.

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