Things keep going from bad to worse for the global airline industry, which has taken such a beating from rising fuel prices that it expects to lose a staggering $5.2 billion dollars this year -- with U.S. carriers accounting for almost all of the red ink.
That bit of cheery news comes from the International Air Transit Association, which says "a toxic combination" of sky-high fuel prices and plummeting demand "continues to poison the industry's profitability." More than 25 airlines have gone under this year, with Italy's Alitalia and the British-Canadian outfit Zoom Airlines the latest to flirt with death. It's a stunning turnaround for an industry that saw a $5.6 billion profit in 2007.
The industry attributes its free-fall to the price of oil. In a familiar but still depressing rehash of the numbers, the IATA says fuel bills have jumped $50 billion this year to an estimated $186 billion. Jet fuel now accounts for 36 percent of the industry's costs, up from 13 percent just six years ago. And while crude oil is trading at about $106 a barrel this week -- way down from the high of $148 we saw in July -- association spokesman Steve Lott tells us it's still too expensive. The year-to-date average is $113 a barrel, up from $73 last year. "Ninety-five dollars a barrel is the price where the business model starts to work," he says. "We think that's the break even point."
The recent drop in fuel prices have brought a measure of relief to the beleaguered industry, but it might be a double-edged sword.
"A drop from $145 a barrel to $110 a barrel indicates less demand for oil, and less demand indicates that the economy is softening," he says, noting that the latest stats on air travel suggest the slowdown is well under way. Industry-wide air traffic in July was up over last year, but by just 1.9 percent. More ominous was the 2 percent drop in cargo traffic (Asian carriers saw air cargo drop 6.5 percent). "Cargo is a good bellwether of the economy," says Lott. "If it's down, there's reason to be concerned." The faltering demand comes even as airlines increase capacity and expand their fleets.
U.S. carriers took the biggest hit, accounting for $5 billion of the projected losses. The rest of the red ink can be found on the balance sheets of Latin American and African carriers. Everyone else -- Europe, the Middle East and Asia -- merely saw profits decline. European carriers expect to see profits decline seven-fold to just $300 million. Still, they've avoided the worst of the bloodletting because the euro is stronger than the dollar, they don't have to compete with discount airlines like Southwest and they have a strong presence in emerging markets like China.
"While some regions will show small profits, the negative impact of the industry crisis is universal," says Giovanni Bisignani, head of the IATA, which includes 230 airlines representing 94 percent of the world's passenger and cargo flights. Things are so bad the IATA is begging everyone short of the skycaps to help the industry survive and U.S. carriers have asked Congress to help dig it out of the mess.
Don't expect next year to be any better. Fuel could account for 40 percent of the airlines' costs next year, and the IATA predicts the industry will lose $4.1 billion in 2009.
Post updated 10:40 a.m. PDT.
Photo by Flickr user Yetto.
