Global Economics

Airlines in Deeper Trouble than Forecast


The airline association predicts industrywide losses will hit $11 billion this year and $5.6 billion in 2010 due to higher fuel costs and discounting

By Andrea Rothman

(Bloomberg) — Airline losses in 2010 will total $5.6 billion, 47 percent wider than an earlier forecast, as oil prices rise while carriers compete for passengers with lower fares, the International Air Transport Association said.

Projected losses for 2010 are about half the $11 billion deficit that IATA predicts for this year. Passenger demand, after a decline of 4.1 percent in 2009, may grow by 4.5 percent in 2010 as the industry rebounds from the recession, IATA General Director Giovanni Bisignani said today in Geneva.

"Fuel costs are rising and yields are a continuing disaster," Bisignani said. Yields, or average fares, fell 12 percent in 2009 and will remain at depressed levels, he said.

The group had forecast in September that the industrywide loss in 2010 would be $3.8 billion. IATA said today that global revenue will rise by 4.9 percent to $478 billion in 2010, below the peak of $535 billion in 2008.

"The worst is likely behind us," Bisignani said. "For 2010, some key statistics are moving in the right direction." Airline non-fuel costs, for example, may decline by 1.3 percent in the coming year, he said.

IATA, which represents 230 airlines carrying 93 percent of international traffic, estimated that jet fuel will represent 26 percent of operating costs in 2010, twice the share in 2001- 2002. IATA predicts that Brent crude oil will average $75 a barrel in 2010, up from an average of $61 this year.

Traffic Decline

Even as economies begin to emerge from a recession that began in late 2008 in the U.S., the benefits of higher growth rates may be slow to trickle through to airlines, which are eliminating jobs and shrinking capacity in response to a drop in first- and business-class traffic.

"Cheap travel is getting even cheaper," Brian Pearce, IATA's chief economist, said at the briefing in Geneva. While average fares may recover somewhat in stronger markets including Asia, he said, the weakest markets for fares will include Europe and the North Atlantic, he said.

"In those markets you're likely to see even more downward pressure on yields," he said.

Air France-KLM Group (AF:FP), Europe's biggest airline, has a target of cutting its workforce by 6.1 percent in the two years through March 2010 and aims for a further reduction of as much as 5 percent in the following year. British Airways Plc (BAIRY) faces a strike during this month's Christmas-New Year holiday, usually one of the industry's most profitable periods, amid a dispute over working conditions.

European Loss

For 2010, European airlines will generate the largest losses of any region at $2.5 billion, IATA said. That's an improvement of $1 billion from the loss forecast for this year. North American carriers may cut losses to $2 billion from $2.9 billion.

Asia-Pacific carriers are forecast to lose $700 million, improving from $3.4 billion in 2009.

Middle East carriers may have losses shrink to $300 million from $1.2 billion in 2009, and African carriers will lose about $100 million, unchanged from 2009.

The only region whose carriers will earn money is Latin America, which may see profits in 2010, as in 2009, of about $100 million, IATA said.

Airline performance began to improve in the third quarter, after worsening in the first half of the year, IATA said. "A move out of recession and to stronger economic growth, particularly in emerging markets, boosted first air freight, and then air travel," the group said.

IATA said that cargo yields, down 15 percent in 2009, should rise 0.9 percent this year.

IATA's projections are based on information from its members, which don't include some of the more profitable discount airlines such as Dallas-based Southwest Airlines Inc. (LUV), Ryanair Holdings Plc (RYAAY), and EasyJet Plc (EJETF) in Europe, and Kuala Lumpur-based AirAsia Bhd (AIABF).

To contact the reporter on this story: Andrea Rothman in Geneva at aerothman@bloomberg.net.


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