Stagflation Threatens Airlines

The International Air Transport Association (IATA) has downgraded its industry profit expectations for 2008 to US$4.5 billion based on global economic growth slowing to 2.6% and the increased price of oil. In September 2007, IATA predicted a US$7.8 billion profit for this year. The initial impact of the credit crunch saw that lowered to US$5.0 billion in December. “We still expect a positive bottom line of US$4.5 billion, but it’s turning out to be a very tough year,” said Giovanni Bisignani, IATA’s director general and CEO. Fuel represents one-third of operating costs and a total bill of US$156 billion. All regions are expected to be profitable in 2008, except for Africa. Compared to 2007, areas with strong commodity markets and strong ties to the booming economies of China, India and Latin America are in general doing better. By contrast, the US and Europe will see significant decreases in profitability. North America should expect a year-end profit of US$1.8 billion (down from US$2.8 billion in 2007); Europe should see US$1.8 billion (down from US$2.1 billion in 2007). “It’s time for governments and labor to get serious about the future structure of the industry. A fragmented industry of over 1,000 players is generating net profit margins around one percent in a good year. There is no secure long-term future for an industry that is constantly on the verge of intensive care,” said Bisignani.