Singapore Air Show

Despite past experience, airlines follow boom/bust

 - December 1, 2006, 6:16 AM

There is something wrong with the airline industry, according to Giovanni Bisignani, the director-general of the International Air Transport Association (IATA). At the Asia/Pacific summit here in Singapore this week, Bisignani reported that airlines ordered a record number of new aircraft last year while collectively losing $6 billion nett (and U.S. operators $10 billion), out of an overall $42 billion global loss since 2001. The losses have come as Airbus forecasts that carriers will spend an average annual $95 billion on new jetliners in the 2004-23 period.
Having vowed after the previous late 1990s’ economic downturn not to become stuck in an endless cycle of peaks and troughs, the return of good times has found air transport companies ordering aircraft as if there were no tomorrow. For some of them, this potential demise might become real if they continue to buy too many seats or sell them for less than cost.

Although the SARS crisis from which airlines were emerging at the time of Asian Aerospace 2004 is “a distant memory,” Bisignani told the summit attendees. “The global crisis of red ink continues.” Reporting a 7.6-percent increase in global international passenger traffic (with Asia/ Pacific business trailing at 6.3 percent, below the level of regional growth in gross domestic product), the IATA official said, “Growth means nothing if the bottom line is red.”

Further, Bisignani said high oil prices which have more than doubled airline fuel bills in two years to almost $100 billion– equivalent to some 23 percent of operating costs–are killing profitability. The fuel price at which airlines can now break even rose from $22 a barrel in 2003 to almost $50 and is expected to climb further to some $55 next year. However, IATA expects actual prices will be lower, permitting airlines to make a global profit of “only” $6 billion in 2007.

The IATA official pointed out that while Asia/Pacific carriers led 2005 regional profitability with gains of $1.5 billion (compared with $1.3 billion earned by European operators), this year’s projected $2 billion profit represents a margin of only about 2 percent.

Bisignani identified three current airline challenges: low-cost carriers (LCCs), possible excess capacity and bird influenza.

Following last year’s record orders, the backlog is equivalent to 29 percent of the current fleet globally, or 48 percent in Asia, making capacity management an issue. “In a normal industry, ordering new capacity would be good news. Unfortunately, there is no mechanism to eliminate existing capacity,” said Bisignani, who warned that the industry must learn from experience. “Excess capacity and reduced profits followed previous delivery peaks in 1991 and 1999. This time we must manage our deliveries better.”  

Avian flu is a “wild card,” according to Bisignani. “If we see efficient human-to-human transmission develop the negative impact could be enormous,” he said. IATA is working closely with the World Health Organization to ensure carriers are prepared.