The global airline industry is heading for a sharp drop in profits this year, according to the International Air Transport Association. The body now expects the industry to post a net profit of around 23 billion dollars, down from about 45 billion dollars last year, roughly halving its bottom line. The downgrade reflects a sudden change in fortunes for a sector that had been counting on another strong year.
The single biggest factor behind the revision is the cost of fuel. IATA expects the industry's fuel bill this year to jump by almost 40 percent, an increase that translates into roughly 100 billion dollars in additional costs. That extra burden is enough to wipe out a large share of the earnings airlines had been expecting, turning what looked like a profitable year into a far more difficult one.
IATA Director General Willie Walsh said the real impact of the higher fuel price did not hit until April. The first quarter had been good, demand was healthy, and airlines were looking forward to another strong year. But with significant disruption in the Gulf and a sharp rise in oil prices, the association is now forecasting lower growth, something Walsh attributed principally to the negative impact on the Gulf region.
Individual carriers are already adjusting their plans in response. Air New Zealand said it would cut more flights in the coming months as it faces rising jet fuel costs alongside softer demand. Speaking at IATA's annual meeting in Rio de Janeiro, chief executive Nikhil Ravishankar described a careful balancing act between protecting revenue and controlling the fuel the airline burns.
Ravishankar said New Zealand remained a strong tourism destination with solid demand, allowing the carrier to push through price increases. Where higher prices start to dent demand, however, the airline is consolidating its flying so that it is not burning unnecessary amounts of fuel, while also attacking costs more broadly. He described that as essentially every airline's playbook, and said the weakness was concentrated in New Zealand domestic demand, with Asia and the United States performing strongly and long-haul and trans-Tasman inbound markets holding up well.
The chief executive also pointed to the squeeze on margins if fuel climbs further. With fuel at around 170 to 175 dollars a barrel and crack spreads near 70 dollars, he said the airline was recovering about 40 percent of the increase, leaving the remaining 60 percent to burn a hole in the balance sheet. He noted a steep backwardation in the fuel forecast curve, underlining the uncertainty hanging over costs as the industry tries to protect its shrinking profits.