IATA Forecast
06-18-2006, 08:29 AM
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IATA Forecast
I read this is one of my travel industry publications, Travel Weekly to be exact. I wanted to just put the link on to the article, but you have to be a subscriber. Sorry for the long post, but thought some here might find this interesting. I get to catch up on my reading on boat days...
Industry’s fuel crisis top of mind at IATA global confab (06/12/2006)
By Andrew Compart
PARIS -Hundreds of airline CEOs and executives who gathered here heard International Air Transport Association director general and CEO Giovanni Bisignani declare this a year of “cautious optimism” for the global aviation industry, thanks to strong economies, high demand for air travel, higher fares and increases in revenue that have been doubling the historical average.
But those executives also heard from oil company executives who told them jet fuel prices might not begin to significantly improve until 2010 -- they may first get worse -- and from a renowned investor who predicted that 2006 might be “as good as it gets” for the airline industry.
For the CEOs, it was a cold reality that, like last year, confronted them as they gathered in Paris June 4 to 6 for IATA’s World Air Transport Summit and Annual General Meeting.
Other topics were discussed and debated, such as a looming deadline for most of the world’s airlines to get rid of paper tickets (see story, “IATA stands by plans to eliminate paper tix by 2008”). There were complaints about airport fees, including a singling out of Newark as the world’s most expensive airport and a court action against the French government for increases at Charles de Gaulle. Also talked about was a mandate that IATA member airlines undergo an IATA Operational Safety Audit by the end of 2007 to remain in the association.
But nothing casts a shadow on the industry these days more than fuel prices. In his state-of-the-industry speech, Bisignani based his “cautious optimism” not only on higher revenue but also a 33% increase in employee productivity and a 13% decrease in airlines’ nonfuel unit costs since 2001. That has helped raise the industry’s break-even fuel price from $14 per barrel for crude oil in 2001 to $50 today, he said.
Of course, the problem is that crude oil prices are well above that; they jumped to $73 per barrel during the conference.
“Oil is the wild card,” Bisignani said. “Prices are racing ahead of efficiency gains and robbing us of our profitability.”
IATA expects the industry’s fuel bill to increase $21 billion this year to $112 billion, accounting for 26% of its operating expenses. That compares with 13% in 2002.
Just a few months ago, IATA was predicting a $2.2 billion industrywide loss in 2006 based on an average oil price of $57 for the year and a $7.2 billion profit in 2007 based on a price of $52. At the conference, IATA released its revised forecast: a $3 billion loss in 2006 based on an average cost of $66. Most of the forecasted loss was from U.S. carriers, but profits are expected to drop in every region. [See By the Numbers, “IATA: Industry a money-loser, thanks to Canadian, U.S. airlines”]. Bisignani no longer is confident 2007 will be a profitable year industrywide.
Paolo Scaroni, CEO of Italian oil company Eni, told airline executives in a general session that fuel prices were high now because they were too low eight years ago, when crude was about $8 a barrel. Low prices made refineries a poor investment for oil companies for decades, he said. That helped create the shortage of refineries today, which is why jet fuel, a refined product, is expected to cost $15 per barrel more than crude this year. Now that prices are higher, refineries have become more attractive, Scaroni said.
With no assurance of short-term relief, airlines keep increasing their efforts to keep raising fuel efficiency for themselves and for the industry. IATA has put out a best-practices book and checklist with fuel-saving measures that have worked. It also has been deploying “go teams” to help individual airlines identify ways to improve.
IATA and airlines are also targeting infrastructure and air traffic control, which they said is inefficient in many parts of the world, putting them on circuitous routes and in excessive holding patterns that force them to burn extra fuel. Lufthansa CEO Wolfgang Mayrhuber said his airline spends the equivalent of 11 Frankfurt-New York flights a day in holding patterns over Germany, a problem that could be alleviated by adding three runways, he said.
IATA said it saved airlines $1.2 billion in 2005 with the “optimization” of more than 300 routes worldwide and said it has identified more than 200 routes it wants to improve in 2006. For example, IATA said it has obtained final approval to implement a more direct route between China and Europe that would cut flight times by an average of 30 minutes and save airlines $30 million a year in fuel costs.
Even so, fuel prices have gotten bad enough that airlines want more research on alternative jet fuels. IATA’s goal is for such fuels to replace 10% of airlines’ needs in 10 years. It’s not yet clear, however, who would take the lead. IATA wants oil companies to put some of their profits into the research, but it doesn’t explain what their incentives would be to do so. In the meantime, ethanol might become an option for some ground-based operations.
As if fuel were not enough of a concern, the industry again has to worry about whether it might again flood the market with too many planes. Airlines around the world ordered more than 2,000 aircraft last year. That concerns David Bonderman, founding partner of Texas Pacific Group and its Asian affiliate, Newbridge Capital.
Bonderman -- whose firm helped save Continental, invested in America West for 10 years and remains invested in Ryanair -- said the aircraft orders are a clear indication that the industry will have to lower fares to fill seats.
KLM president and CEO Leo van Wijk took issue with that. He said many carriers would use the new aircraft to replace inefficient ones.
But Bisignani warned that record aircraft orders “could be our Achilles heel.”
Bonderman said he believed the industry will look back at 2006 as a “peak year,” when a strong economy and capacity constraint resulted in renewed pricing power that would have made it very profitable if fuel prices were lower.
To contact reporter Andrew Compart, send e-mail to [email protected].
Industry’s fuel crisis top of mind at IATA global confab (06/12/2006)
By Andrew Compart
PARIS -Hundreds of airline CEOs and executives who gathered here heard International Air Transport Association director general and CEO Giovanni Bisignani declare this a year of “cautious optimism” for the global aviation industry, thanks to strong economies, high demand for air travel, higher fares and increases in revenue that have been doubling the historical average.
But those executives also heard from oil company executives who told them jet fuel prices might not begin to significantly improve until 2010 -- they may first get worse -- and from a renowned investor who predicted that 2006 might be “as good as it gets” for the airline industry.
For the CEOs, it was a cold reality that, like last year, confronted them as they gathered in Paris June 4 to 6 for IATA’s World Air Transport Summit and Annual General Meeting.
Other topics were discussed and debated, such as a looming deadline for most of the world’s airlines to get rid of paper tickets (see story, “IATA stands by plans to eliminate paper tix by 2008”). There were complaints about airport fees, including a singling out of Newark as the world’s most expensive airport and a court action against the French government for increases at Charles de Gaulle. Also talked about was a mandate that IATA member airlines undergo an IATA Operational Safety Audit by the end of 2007 to remain in the association.
But nothing casts a shadow on the industry these days more than fuel prices. In his state-of-the-industry speech, Bisignani based his “cautious optimism” not only on higher revenue but also a 33% increase in employee productivity and a 13% decrease in airlines’ nonfuel unit costs since 2001. That has helped raise the industry’s break-even fuel price from $14 per barrel for crude oil in 2001 to $50 today, he said.
Of course, the problem is that crude oil prices are well above that; they jumped to $73 per barrel during the conference.
“Oil is the wild card,” Bisignani said. “Prices are racing ahead of efficiency gains and robbing us of our profitability.”
IATA expects the industry’s fuel bill to increase $21 billion this year to $112 billion, accounting for 26% of its operating expenses. That compares with 13% in 2002.
Just a few months ago, IATA was predicting a $2.2 billion industrywide loss in 2006 based on an average oil price of $57 for the year and a $7.2 billion profit in 2007 based on a price of $52. At the conference, IATA released its revised forecast: a $3 billion loss in 2006 based on an average cost of $66. Most of the forecasted loss was from U.S. carriers, but profits are expected to drop in every region. [See By the Numbers, “IATA: Industry a money-loser, thanks to Canadian, U.S. airlines”]. Bisignani no longer is confident 2007 will be a profitable year industrywide.
Paolo Scaroni, CEO of Italian oil company Eni, told airline executives in a general session that fuel prices were high now because they were too low eight years ago, when crude was about $8 a barrel. Low prices made refineries a poor investment for oil companies for decades, he said. That helped create the shortage of refineries today, which is why jet fuel, a refined product, is expected to cost $15 per barrel more than crude this year. Now that prices are higher, refineries have become more attractive, Scaroni said.
With no assurance of short-term relief, airlines keep increasing their efforts to keep raising fuel efficiency for themselves and for the industry. IATA has put out a best-practices book and checklist with fuel-saving measures that have worked. It also has been deploying “go teams” to help individual airlines identify ways to improve.
IATA and airlines are also targeting infrastructure and air traffic control, which they said is inefficient in many parts of the world, putting them on circuitous routes and in excessive holding patterns that force them to burn extra fuel. Lufthansa CEO Wolfgang Mayrhuber said his airline spends the equivalent of 11 Frankfurt-New York flights a day in holding patterns over Germany, a problem that could be alleviated by adding three runways, he said.
IATA said it saved airlines $1.2 billion in 2005 with the “optimization” of more than 300 routes worldwide and said it has identified more than 200 routes it wants to improve in 2006. For example, IATA said it has obtained final approval to implement a more direct route between China and Europe that would cut flight times by an average of 30 minutes and save airlines $30 million a year in fuel costs.
Even so, fuel prices have gotten bad enough that airlines want more research on alternative jet fuels. IATA’s goal is for such fuels to replace 10% of airlines’ needs in 10 years. It’s not yet clear, however, who would take the lead. IATA wants oil companies to put some of their profits into the research, but it doesn’t explain what their incentives would be to do so. In the meantime, ethanol might become an option for some ground-based operations.
As if fuel were not enough of a concern, the industry again has to worry about whether it might again flood the market with too many planes. Airlines around the world ordered more than 2,000 aircraft last year. That concerns David Bonderman, founding partner of Texas Pacific Group and its Asian affiliate, Newbridge Capital.
Bonderman -- whose firm helped save Continental, invested in America West for 10 years and remains invested in Ryanair -- said the aircraft orders are a clear indication that the industry will have to lower fares to fill seats.
KLM president and CEO Leo van Wijk took issue with that. He said many carriers would use the new aircraft to replace inefficient ones.
But Bisignani warned that record aircraft orders “could be our Achilles heel.”
Bonderman said he believed the industry will look back at 2006 as a “peak year,” when a strong economy and capacity constraint resulted in renewed pricing power that would have made it very profitable if fuel prices were lower.
To contact reporter Andrew Compart, send e-mail to [email protected].
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