Global airline industry losses will widen this year to a record $6 billion as fuel bills surge, forcing carriers to do more to cut costs, the International Air Transport Association said.
Airline fuel bills may rise 31 percent to $83 billion in 2005, based on an average price of $47 a barrel for Brent crude oil, IATA Director-General Giovanni Bisignani told a conference today in Tokyo. Losses would be 25 percent more than last year.
The industry lost more than $36 billion between 2001 and 2004, led by U.S. carriers. UAL Corp.'s United Airlines and Continental Airlines Inc. are asking labor unions to accept wage and benefit cuts to restore profits, while Asian carriers such as Cathay Pacific Airways Ltd. are adding fuel surcharges to fares.
``There's a limit as to how airlines can increase their fuel surcharges,'' said Mark Tan, a strategist at UOB Asset Management Ltd. in Singapore, which owns shares of Singapore Airlines Ltd. and Thai Airways International Pcl among $3.5 billion of Asian equities under management. Airlines have not been able to fully cover their costs with surcharges, Tan said.
The forecast was higher than Geneva-based IATA's April forecast of $5.5 billion for the airline industry, which generates $400 billion in sales and employs 4 million people. The price of jet fuel, which makes up between 15 percent and 40 percent of a carrier's operating costs, surged as much as 70 percent last year.
Fuel and Profit
Brent crude-oil for July delivery was trading at $50.70 a barrel on May 27 on London's International Petroleum Exchange, where it reached a record $57.65 a barrel on April 4. The price of jet fuel has surged 88 percent in the past three years, and the industry's oil expenses have doubled, IATA said.
The price of Brent crude oil may remain at about $50 a barrel this year, ``with potential to the upside greater than the downside,'' said the industry-funded group. The likelihood of oil price falling below $40 per barrel is remote, IATA said.
Airlines were profitable in Asia, Europe and the Middle East, with South American carriers ``near break even'' last year, said IATA's Bisignani.
North American carriers together lost $9 billion last year as labor costs were high and low-fare competition drove down fares, he said. United Airlines, the world's second-largest carrier, has been in bankruptcy court since May 11. Air Canada, the nation's largest airline, reported a smaller first-quarter loss of C$77 million, after emerging from bankruptcy last October.
African airlines lost more than $150 million last year, IATA said. Middle Eastern airlines such as Emirates, based in the United Arab Emirates, made $100 million of net income on higher travel demand, he said.
Asian carriers recorded $2.6 billion in combined profit last year, boosted by strong growth in China and lower labor costs, the group said. Singapore Airlines, Asia's most profitable carrier, posted a fourth-quarter profit of S$297.8 million ($181 million), beating analysts' expectations by about 36 percent.
European carriers posted a $1.4 billion profit as ``consolidation helped capacity management,'' Bisignani said.
Hedging
``The extraordinary price of fuel is destroying our industry,'' Bisignani said. ``Cost efficiency is the new paradigm.''
The fuel bill at Air France-KLM Group, Europe's largest airline, is likely to rise by 1.3 billion euros ($1.6 billion) this year, Chief Executive Jean-Cyril Spinetta said in Tokyo, without giving details.
Austrian Airlines Group expects its oil expenses to rise 40 percent this year, Chief Executive Vagn Soerensen said in an interview.
Airlines could save as much as $2 billion this year by using fuel more efficiently, with every 1 percent improvement in efficiency cutting costs by $800 million a year, IATA said.
The group aims to help carriers cut their oil bills by lobbying governments to give flight clearance for shorter routes, such as between Europe and China, and asking airports to improve their traffic flows, said Guenther Nattschnig, IATA's vice president for safety, operations and infrastructure.
Surcharges Needed
Airlines must use fuel surcharges to protect their earnings, said Winson Fong, who owns airline stocks among the $2.3 billion of Asian equities he helps manage for SG Asset Management in Singapore.
Taiwan's China Airlines said it would use surcharges and hedging, or advance contracts, to mitigate higher fuel cost. The Taipei-based carrier has hedged 58 percent of fuel costs this year and 30 percent for 2006, Chairman Chiang Yao-Chung said today.
``We have applied to raise our surcharge on regional routes to $7.30 from $5 and to $22.30 on long-haul flights from $15,'' he said, without saying when the surcharges would be added.
Austrian Airlines has already maximized the benefit of surcharges and won't be able to increase them further, Soerensen said. Austria's largest carrier, which is expecting a loss this year, is also struggling with hedges and has reduced its forward contracts to 3.5 percent of requirements this year, after 40 percent in 2004, Soerensen said.
``If you buy forwards now, it's prohibitively expensive,'' he said in an interview. ``The dollar is getting stronger, and that adds to the fuel bill,'' since oil is sold in dollars.
Airline Shares
The shares of Asian airlines trade mixed today. The 14 airlines tracked by the Bloomberg Asia-Pacific Airlines index rose 0.2 percent to 130.55, with seven airline stocks rising, five falling and two trading unchanged.
Singapore Airlines, Asia's most profitable carrier, rose almost 1 percent to S$11.60. Shares of Japan Airlines Corp., the region's largest carrier by sales, rose 0.6 percent to 312 yen.
Shares of China Eastern Airlines Corp., the country's third-largest carrier, fell 2.2 percent to HK$1.36 in Hong Kong.
Korean Airlines Corp., the world's second-largest freight carrier, and which doesn't hedge its oil needs, fell 3 percent to 17,800 won in Seoul.
Airlines could have been profitable on average last year because the global business grew 8 percent, Bisignani said. ``Without the incredible fuel bill, we could have returned to a profit,'' he said.
Source: Susanna Ray in Tokyo - bloomberg.net
