Aviation crunch looming as fuel prices soar

Given that the airline industry is usually regarded as the head that wags the travel and tourism tail, it is always prudent to keep an eye on what's going on in the aviation sector.

And with the arrival of 2008, the signs are not that promising with pundits predicting a period of turbulence for the world's airlines.

Soaring fuel prices and slowing economic growth are putting the squeeze on airlines with the International Air Transport Association (IATA) slashing its industry forecasts for the second time in six months.

In its latest forecast, IATA has revised next year's industry profits to US$5 billion, from the US$7.8 billion which it predicted in September 2007. In June 2007, it had made an optimistic forecast of US$9.6 billion.

Its rosy forecasts had been made on the back of healthier days. Airline earnings had improved strongly throughout 2007; aggressive efforts to cut costs had reduced non-fuel expenses by 16% since 2001; sales and marketing costs had fallen by 25% and labour productivity had risen by 64% - all of which had led IATA to predict a dramatic rebound for the sector, from the staggering US$13 billion loss in 2001.

For the first 10 months of 2007, IATA said passenger traffic grew 7.3% from 2006.

Air travel in the US to slip

However, it is now predicting that the increasing risk of a sharp US economic downturn this year could threaten to dampen air travel, especially among business passengers. The US domestic market represents about 30% of global air traffic.

IATA has said that North American carriers will see the largest fall in profitability this year to US$2.2 billion, from US$2.7 billion in 2007.

With 35% of the fleet over 25 years old, the impact of high fuel prices is greater than in other regions. Moreover, the region is at the centre of the credit crunch, said the aviation body.

European and Asian carriers will see minor drops in profitability of US$100 million each to US$2.0 billion and US$600 million respectively. Robust traffic growth to and within Asia is expected to partially insulate carriers from the impact of the crunch, said IATA.

Load factors in China surge

China, in particular, is leading the aviation boom in the region. According to the 13 December 2007 issue of the Centre for Asia Pacific Aviation (CAPA) newsletter, China's airline industry load factors surged to just under 80% during the annual summer traffic peak in 2007.

"In the three months leading up to 30 September 2007, the continuing high traffic growth rate pushed combined load factors to 79.4%, helping most major airlines turn stronger profits than 2006, according to a Civil Aviation Administration of China report," said the CAPA newsletter.

However, Executive Chairman Mr Peter Harbison cautioned: "In this strong expansionary climate, higher fuel prices have been readily absorbed and yields necessarily improved. But the problem remains of accommodating such rapid growth on a now-substantial base and systemic operating problems are continuing to grow. On-time departures are below 80% across the sector and all major airports are heavily congested. In these conditions, airport and airway investments - and improvements - become increasingly critical."

Citing another driver of growth, Mr Harbison said that based on known aircraft orders, low cost carriers in the Asia Pacific and Middle East would expand their seat capacity by 250% by 2012 - which means 40 to 50% growth every year for the next five years.

Air Asia, he said, could become the largest airline in Asia by 2013, carrying between 70 and 80 million passengers a year.

Meanwhile, last year also saw record aircraft sales, said CAPA. Airbus should have sold 1,300 aircraft by end 2007 while Boeing is up to 1,154 sales to date, with more expected.

Said CAPA: "2007 will indeed be a record year for sales, but 2008 will certainly see a pause for recovery, after this year's order binge."