Rising oil prices now a greater risk than European crisis – IATA

The risk of a worsening Eurozone crisis has been replaced by an equally toxic risk—rising oil prices

MANILA, Philippines – A global aviation industry group slashed its 2012 profit forecast for airlines all over the world by $500 million as oil prices continue to soar.

The Geneva-based International Air Transport Association (IATA) said in a statement on Tuesday, March 20, that it expects oil prices, based on Brent crude, to reach an average $115 per barrel this 2012 from its previous forecast of $99.

“2012 continues to be a challenging year for airlines. The risk of a worsening Eurozone crisis has been replaced by an equally toxic risk—rising oil prices. Already the damage is being felt with a downgrade in industry profits to $3.0 billion,’’ said IATA Director General and CEO Tony Tyler.

Jet fuel accounts for 40% to 60% of an airline’s total operating expenses.

Local carriers Cebu Pacific and Philippine Airlines have reported that their profits were drastically slashed in 2011. Cebu Pacific, in particular, blamed high oil prices for its profit decline of 48%.

These have led the airlines to request the Philippine aviation body to allow them to increase their “fuel surcharges,” or a portion of their airfare tickets that they could pass on to consumers.

Tensions in oil-rich nations

The average price year-to-date is approaching $120. This will push fuel to 34% of average operating costs and see the overall industry fuel bill rise to $213 billion.

The global price hike has largely been the result of the geopolitical and other tensions being experienced by oil-rich nations in the Middle East and north Africa “could put the industry into losses,” IATA said.

IATA is particularly following the crisis in Iran since a worsening scenario there could result in the closure of the Strait of Hormuz,  cutting off vital supply links for oil.

“In this scenario, oil prices could spike at $150/barrel for Brent crude mid-year, for a full year average of $135. In such a scenario, global GDP growth would fall to 1.7%, plunging the entire industry towards losses of over $5 billion,” IATA said.

The IATA said that the skyrocketing oil prices have muted the improvements in the following factors that usually affect airlines:

  • the avoidance of a significant worsening of the Eurozone crisis
  • improvement in the US economy
  • cargo market stabilization
  • slower than expected capacity expansion

“While we have seen some improvements in economic prospects any further significant rise in the fuel price will almost certainly turn weak profits into losses,” said Tyler.

Government strategy  

IATA called for governments to take a more strategic approach to the aviation industry.

“Airlines are buffeted by many forces beyond their control. Today’s forecast demonstrates just how quickly the operating environment can change. Four months ago the biggest worry was a European financial disaster; today it is rapidly rising oil prices. Nimbleness and operating efficiency are critical to maintaining competitiveness and managing through such dramatic shifts,” said Tyler.

“A sustainable airline industry could deliver much more to the global economy. But the unintended consequences of many government policies have contributed to keeping the industry on a knife-edge between profit and loss. Short-sighted excessive tax collection in many markets undercuts aviation’s ability to provide access to the connectivity that drives global business,” said Tyler.

Previously, IATA issued a strong statement urging the Philippine government to review the tax regime for foreign airlines.

“Today’s industry situation reinforces the need for governments to take a more strategic approach to aviation with competitiveness-enabling policies that will deliver broad economic benefits,” Tyler stressed. – Rappler.com

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