The International Air Transport Association (IATA), the worldwide trade body for airlines, has revised downwards its forecast for the overall financial performance of the world’s airlines in 2009.
Giovanni Bisignani, IATA’s director general and CEO, says combined airline losses in 2008 and 2009 are going to be worse than the adverse financial impact on the airline industry that the terrorist attacks of September 11, 2001 caused.
Moreover, as airline revenues continue to tumble, the industry’s revenues are not likely to recover to 2008 levels until at least 2012 and the situation is now critical for many smaller airlines, he warns. Last week, indeed, Central Europe-based low-cost airline SkyEurope failed, stranding thousands of passengers.
IATA now predicts that, globally, airlines will lose $11 billion this year. This is $2 billion worse than the association’s previous forecast of a $9 billion airline loss in 2009, with the difference due to rising fuel prices and exceptionally weak yields. Yield is the standard airline-industry measure of revenue per passenger seat (or per cubic foot of cargo space) per mile or kilometer.
Passenger yield is derived for a flight by dividing total passenger revenues by the product of the total number of seats on the aircraft and the route distance. Cargo yield, similarly, is derived by dividing the total cargo revenue by the cubic-foot volume of the aircraft times the specified distance for the route.
The association now expects total airline-industry revenues for the year to fall by $80 billion to $455 billion, a 15 per cent decline compared with 2008 levels.
IATA also revised its loss estimate for 2008 from a loss of $10.4 billion to a loss of $16.8 billion. This revision reflects restatements and clarification of the accounting treatment of very large revaluations to goodwill and fuel hedges on airlines’ profit-and-loss statements. IATA industry profit figures strip out such extraordinary items, which are not realized in cash terms.
“The bottom line of this crisis — with combined 2008-9 losses at US$27.8 billion — is larger than the impact of 9/11,” says Bisignani. Industry losses for 2001-2002 were $24.3 billion, IATA calculates.
“This is not a short-term shock. $80 billion will disappear from the industry’s top line. That 15 per cent of lost revenue will take years to recover,” says Bisignani. “Conserving cash, careful capacity management and cutting costs are the keys to survival. The global economic storm may be abating, but airlines have not yet found safe harbor. The crisis continues.”
IATA says three main factors are driving the expected losses:
● Demand: Passenger traffic is expected to decline by 4.0 per cent and cargo by 14 per cent for 2009 (compared to declines of 8.0 per cent and 17 per cent respectively in IATA’s last 2009 forecast, in June). By July, cargo demand was down 11.3 per cent and passenger demand was down 2.9 per cent on 2008. While both are improvements over the low-point declines of 23.2 per cent for cargo in January and 11.1 per cent for passengers (in March), both markets remain weak.
● Yield: Yields are expected to fall 12 per cent for passenger operations and 15 per cent for cargo operations, compared with declines of 7 per cent and 11 per cent respectively in IATA’s June forecast. The fall in passenger yield is led by a 20-per-cent drop in demand for premium-class travel, says IATA. Cargo-volume utilization remains at less than 50 per cent despite the removal of 227 freighters from the global fleet, the association says, adding that there is little hope for an early recovery in yields in either the passenger or cargo markets.
● Fuel: Spot oil prices have been driven up sharply in anticipation of improved economic conditions. Oil is now expected to average $61 per barrel (Brent) for the year, up from $56 per barrel in the June forecast. This will add $9 billion in cost for a total expected 2009 fuel bill of $115 billion for the airlines.