By Ed Attwood
Regional airlines to make only $100m this year on high oil price and Arab political unrest
Political unrest and the high oil price will combine to leave Middle East and North African airlines with only $100m of profits this year, down from $900m in 2010, according to the International Air Transport Association (IATA).
The global body said that although the major airlines in the region would continue to win market share on long-haul markets, “high fuel costs will weaken demand from key passenger segments and asset utilisation will be under downward pressure.”
IATA also warned that regional capacity growth of 15.5 percent is expected to outstrip demand expansion of 14.6 percent.
Worldwide, IATA said that airlines would only make $4bn in profits this year, down by 78 percent compared to last year – with a margin of only 0.7 percent.
“That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance,” said IATA director general and CEO Giovanni Bisignani.
“The efficiency gains of the last decade and the strengthening global economic environment are balancing the high price of fuel.”
For each dollar increase in the average annual oil price, IATA predicts that airlines will face an extra $1.6bn in costs. Fuel now makes up as much as 30 percent of airline costs – more than double the 13 percent figure a decade ago.
Low-cost carriers in the Gulf –which operate on lower profit margins - said soaring fuel costs had outpaced political instability and natural disasters as the biggest threat to growth.
Adel Ali, group CEO of Air Arabia, said there would be casualties if oil prices continue to rise.
“It is a time to focus on cost. If the oil price continues [to rise] some of [the regional carriers] will find no reason to continue business when they have to put in their own money. They wouldn’t do that,” he said at an event in Dubai in May.
“I think anyone who runs a bad airline is a potential casualty. Naturally if you’re a private owner, you’re more [at risk] because there is nobody to hold you back.”
Two local no-frills carriers have ceased operations in the last 12 months, citing cost concerns.
Saudi Arabia’s Sama Airlines shut down in August after seeing a $266m loss, while Kuwait’s Wataniya Airways ceased trading in March after significant losses.
“We are an industry that changes all the time,” said Oman Air’s chief officer of corporate affairs (COCA) Philippe Georgiou. “But what do you do about an oil price that keeps increasing? You can’t pass all these costs to the customers.”
Analysts said passenger air fares may rise as airlines struggle to accommodate the rise in costs.
“The increase in oil price has forced airlines to park some of their planes to cut down on their fuel bills affecting the airline capacity and profitability,” Frost & Sullivan said in an emailed statement. “Low-cost carriers in Middle East work on lower margins, due to their bargain airfares. This would make it difficult for these carriers to remain profitable if jet fuel prices were to increase from current levels.
“If that happens, their best chance of survival will be to pass the cost to passengers by imposing a significant fuel surcharge.”
The high oil price is also hitting demand for services, despite marginally higher global GDP projections this year, the IATA report said.
“Passenger demand is now expected to grow 4.4% over the year, a full 1.2 percentage points below the 5.6% previously forecast in March,” the report said. ”Similarly, cargo demand is expected to increase 5.5% and not 6.1% as predicted earlier.”For all the latest transport news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Presumably any profit hit of this magnitude that Emirates' has to take this year will considerably lower its potential contribution toward Investment Corporation of Dubai's debt repayment due in September this year.
Just an aside, is Iata referring to purely to a drop in passenger profits or cargo as well, i.e. across the board? If so then that is grim news.
At least revenue earned from tourist spending is reportedly up to $ 7 billion plus, but didn't the IMF allegedly calculate that the state loan repayments coming due this year are well over $ 6 billion?