Global Airlines Cut Profits Forecast
The International Air Transport Association (IATA) slashed its 2011 profit forecast to $8.6 billion, saying political unrest in the Middle East and the resulting spike in oil prices, will reduce net income of commercial airlines to nearly half of the $16 billion they now say carriers earned in 2010.
The forecast is a significant revision from the $9.1 billion forecast originally made in December 2010 before oil prices surpassed $100 a barrel, following protests that erupted throughout several oil-producing countries including Libya, which controls 2% of the world's oil supply.
"We are constantly walking on a tightrope of very thin margins, and there is no buffer against shocks" said IATA director general Giovanni Bisignani, in a speech today in Geneva, Switzerland. "So everything that hits us has the potential to knock us over."
He noted that the 2.9% profit margins seen in the industry in 2010, are now expected to fall to 1.4% in 2011. When the original IATA forecast was made in December, the assumptions were based on an average of $84 a barrel for Brent crude oil, which have since been revised upward to $96 a barrel. The price of oil has jumped significantly in recent weeks, particularly since protests spread from Egypt to Libya.
Despite the revision, IATA, which has some 230 airline members worldwide, has maintained its profit forecast for North American carriers. The association says North American carriers are expected to make $3.2 billion in 2011, compared with $4.7 billion in profit's a year ago. The group says that previously announced cuts in capacity by carriers will offset higher oil prices.
American Airlines treasurer Beverly Goulet on Tuesday told an investor conference that the airline would trim capacity growth by 1% due to higher fuel prices, according to a presentation filed with federal regulators. She noted that the airline has seen increased attempts to raise fares due to higher fuel costs.
The airline also took a $50 million hit against annual revenue due to 8,000 weather-related cancellations during the first 45 days of 2011, she said.
Delta Air Lines in February said it would reduce its capacity growth schedule to offset the impact of higher fuel costs.
Helane Becker, an analyst with Dalhman Rose & Co., said the airline industry is somewhat limited in their ability to counter higher fuel prices with cost cutting.
"I think the biggest opportunities are to ground older aircraft that tend to be maintenance intensive and more expensive on a fuel cost standpoint," she told AOL Travel News.
Consumers are likely to eventually react to carriers raising ticket prices, she said, and the airlines may instead look to raise additional revenue through fees – for aisle seats, for example.
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