Fuel spike threatens industry rebound
Oil will stay expensive even if unrest in the Middle East calms down, according to IATA chief economist Brian Pearce
A fully electronic air cargo industry would cut its costs by $4.9 billion a year, a crucial contribution to making the aviation business sustainable, IATA director general and CEO Giovanni Bisignani told the World Cargo Symposium in Istanbul.
Airlines were in the black by $16 billion last year, a major achievement after $50 billion of losses over the last decade, but Bisignani said a margin of 2.9 percent represented no real cause for celebration.
He was encouraged by the latest GDP growth forecast of 3.1 percent for this year, though the soaring price of oil will surely have economic forecasters adjusting their sights. An oil price averaging $96 per parrel this year would halve airline profits to $8.6 billion.
“World trade growth reached 10 percent late last year. The question is how durable that will be given world oil prices,” said Brian Pearce, IATA’s chief economist.
Pearce said profits from cargo had climbed back toward their 2006-07 level in the first half of 2010, but came under pressure as soon as fuel prices began increasing. “If prices are still at these levels, there will be some slowdown in economic growth. The risk is not volumes disappearing, but a further squeeze on margins,” he said.
The International Energy Agency had announced that “cheap oil” was over, and Pearce said airlines would have to base their cargo pricing models on a price of $100 regardless of developments in the Middle East, since the risk premium attaching to the turmoil there accounted for only $10-15 per barrel.
Airline chief financial officers started to lose confidence from January, according to an IATA poll. Heads of cargo were gloomier still, giving prospects for future volumes an average score of 70 (on an index where 50 is neutral) but rating the yield trend at a barely-improving 55.
Growth in semiconductor shipments, which closely match the trend in broader airfreight volumes, slowed sharply to 6 percent at the end of last year. This reflected the end of the recent restocking cycle, Pearce said.
Business expenditure was encouraging. Companies now had surplus cash and were committing to capital projects as well as investing in people, he commented. Purchasing managers globally were as confident as they had been at the 2007 peak of the business cycle.
US consumer confidence was picking up despite serious problems in the economy and a huge fiscal deficit, but European consumers were “moving sideways,” Pearce said. China was also slowing as the government tried to put a brake on inflation, affecting both purchasing managers and consumer sentiment.
Cargo rates excluding surcharges were slipping, and Pearce quoted a fall from $2.90 to $2.40 per kilo from southeast Asia to Europe in the second half of 2010. The base rate fall was serving to offset the application of fuel surcharges, he said. Load factors had also fallen globally by three or four percentage points since May, though were still at a relatively healthy 77-78 percent.
A significant increase in deliveries of widebodied aircraft this year, which would add 8 percent to the global fleet if no retirements were taken into account, may further dent profits even though emerging markets such as Latin America, the Middle East and Asia Pacific were still running strongly, Pearce said.
