Iata cuts its airline profits forecast on high oil cost

Airlines will see their profits almost halve this year because of the recent jump in oil prices, the International Air Transport Association (Iata) says.

Net profit for the industry will be $8.6bn (£5.3bn) in 2011, down from $16bn in 2010, Iata said. It had previously forecast earnings of $9.1bn.

According the group, rising oil prices will pose the biggest threat to carriers' earnings this year.

Last week, Brent crude hit a two-and-a half-year high of $119 a barrel.

There have been concerns about the extent of the impact on oil supplies as unrest in Libya and the Middle East continues.

Analysts warned that if the protests spread to other oil-producing countries, then crude prices may jump further.

"If it continues to spread, Middle East tensions may reach a point where a war could start and that could ignite an incredible rally," said Ryoma Furumi of Newedge Japan.

Offsetting costs

Iata said that even though it expected overall passenger numbers to grow by 5.6% in 2011, and cargo transport volumes to rise by more than 6%, the high oil prices were squeezing profit margins.

Fuel accounts for almost 40% of an airline's operating costs and so far the companies had resisted passing on all of their bigger fuel bill to consumers, Iata said.

Jet fuel prices have almost doubled since early 2009, but average return fares during the same period have risen by 20%, the airlines' association estimated.

Giovanni Bisignani, Iata's director general, warned that while the increase in ticket prices and fuel surcharges may have been enough to offset the rising cost for now, any further increase in oil prices would have a detrimental effect on airlines.

"There is very little buffer for the industry to keep its balance as it absorbs shocks," he said.

"Today oil is the biggest risk. If its rise stalls global economic expansion, the outlook will deteriorate very quickly."

Regional imbalance

Iata said that global growth in the airline industry would be patchy as economies expanded and recovered at different speeds.

Asia-Pacific is forecast to do better than many other regions because many of its economies are growing steadily.

However, earnings there will also be under pressure.

Iata forecast that airlines in the Asia-Pacific region will deliver a collective profit of $3.7bn in 2011, down from the $7.6bn that they made in 2010.

It added that airlines from the region were more vulnerable to the impact of rising fuel prices due to the fact that they had done relatively little hedging to protect themselves against a surge in costs.

They were also being hit by a slowdown in trade and cargo demand from China after the government there put in place measures to fight inflation.

In Europe, airlines are expected to struggle as travel demand is hampered by recession and slow growth, and fears over the European debt crisis, Iata said.