IATA cuts profit forecast to $3b on higher fuel

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IATA is forecasting airline industry net profits of $3 billion for 2012, slashing $500 million off its previous figure and warning of risks from higher-than-expected fuel prices.

The airline association expects an oil price average of $115 per barrel for 2012 - a hike on its expectations of a $99 average it expected just three months ago. This will increase the industry fuel bill up to $213 billion, making up more than a third of airline costs.

But IATA believes this impact is, in part, mitigated by improved yields amid tighter capacity discipline, as well as signs of stability in the cargo market, prompting the relatively small downward adjustment in profits. But the $3 billion net is still less than half the $7.9 billion profit for 2011.

IATA has warned of the danger than any further spike in fuel prices - currently $139 per barrel - could plunge the industry into losses of up to $5 billion if the level reaches $150.

Speaking during a briefing on the forecast, IATA director general Tony Tyler said: "It's going to be a challenging year for the industry to cope with higher fuel costs, because unlike 2010 we are seeing slower [economic] growth.

"If oil prices do spike to that sort of [$150] level there is a double hit for the airlines. On the one hand revenues would be hard-hit as high oil prices hit economic activity and travel demand and, on the other hand, airline fuel bills will rise.

"We remain hopeful that [a spike] won't happen. But the risk to oil certainly seems to be more on the upside."

IATA identifies high oil prices as the chief risk to its current forecast, after scaling back its concerns over the possible risk from Europe's sovereign debt crisis escalating into a full banking crisis - which had prompted it in December to issue a separate worst-case scenario which forecast possible industry losses of $8 billion.

"What we are trying to do is explain some of the risks. In December it looked as though there was a possible threat from the European debt crisis escalating," explains IATA chief economist Brian Pearce. "The action of the central banks and the bailout of Greece seems to have averted the default crisis. But in its place we are now facing sharply-rising oil prices that we had not expected at the time."

While IATA does not expect Europe's sovereign debt crisis to be a problem in 2012, Pearce adds the risk has not gone away completely: "That sort of crisis could still hit the industry. Its still there as a threat that could re-emerge."