Women pose in flight attendant uniforms with a model of the Airbus A-380 airplane.
Emirates, the biggest airline by international traffic, said more carriers will go bust this year as fuel costs and sluggish economies undermine profitability.
“We can reel off a whole load of airlines that are teetering on the brink or are really gone,” Tim Clark, the Dubai-based carrier’s president, said in an interview. “Roll this forward to Christmas, another eight or nine months, and we’re going to see this industry in serious trouble.”
March 22 (Bloomberg) -- Tony Tyler, chief executive officer of the International Air Transport Association, discusses the potential impact of higher oil prices on airlines. He talks from Geneva with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Airline profits will plunge 62 percent in 2012 to $3 billion, equal to a 0.5 percent margin on sales, as oil prices rise, the International Air Transport Association said this week. Emirates’s fuel bill accounts for 45 percent of costs and may jump by an “incredibly challenging” $1.7 billion in the year ending March 31, according to Clark, who says he’s sticking with a no-hedging strategy rather than risking a losing bet.
“You think you’re going to win, but in the long term you always lose,” Clark said yesterday at the Gulf carrier’s head office near Dubai International Airport. “When we enter into derivatives, betting whatever it may be with counterparties who actually control the price of fuel in the first place, you have to ask yourself, ‘Is that smart?’”
AMR Corp. (AMR1)’s American Airlines is restructuring after filing for Chapter 11 bankruptcy and India’s Kingfisher Airlines Ltd. (KAIR) may lose its license as it struggles with cash shortages and losses. That’s after Barcelona-based Spanair SA collapsed Jan. 27, followed that week by Hungarian national carrier Malev Zrt. (MALEV)
Clark said some private airlines will need to be bailed out by governments in the countries where they’re based, though that will raise aid issues with the European Union and other parties.
In the U.S., more filings for Chapter 11 protection are likely, while smaller carriers operating in the Indian Ocean region and in Africa face “difficulties,” the executive said.
“This is what the fuel prices are doing,” he said. “It’s about time somebody sitting there, controlling the fuel prices, began to look a little bit more seriously at the devastation it’s causing, not only to airlines but to the global economy.”
The industry couldn’t survive a further 10 or 15 percent increase in fuel prices, especially with the European Union’s carbon emissions trading system about to add to costs, he said.
At Emirates the fuel bill, while not over budget, has “zapped the bottom line,” and that will be evident in annual results scheduled to be published next month, Clark said.
Earnings at Emirates are also being hurt by the continued grounding of Airbus SAS A380 superjumbos, of which it’s the No. 1 operator, after the discovery of wing cracks. Six of the jets, which generate $50,000 an hour 15 hours a day, are out of action for repairs, idling 830 cabin crew and 160 pilots, and the carrier is having to compensate people set on an A380 trip.
“That’s had a poleaxing affect in the last nearly three months,” Clark said, estimating the revenue loss so far at $90 million. “Those airplanes are always full, they’re always popular. We’ve had multiple cancellations. We’ve had people telling us ‘Well you sold me the A380’, so we had to throw in 5,000 or 10,000 miles or give money back. It’s a mess.”
Emirates operates 21 A380s, with 69 more on order as it seeks to establish Dubai as a global hub in competition with Abu Dhabi-based Etihad Airways, Qatar Airways Ltd. and European carriers including Air France-KLM Group (AF) and British Airways.
The company is due to get five more A380s by September, and Clark said he’ll meet Airbus next week to determine whether that could change and what the solution to the wing cracks will be.
Clark said Emirates passed on an opportunity to invest in Air Berlin Plc (AB1), Europe’s third-biggest discount carrier, which sold stock to Etihad. “We decided it wasn’t for us,” he said.
Though Qatar Air is also buying 35 percent of cargo specialist Cargolux Airlines International SA, the CEO said he’s not interested in purchases in Europe or elsewhere, having ended a decade-long management accord with SriLankan Airlines in 2008 after the Asian country’s government sought more control.
“We have enough to do without getting involved in the running of other businesses, even though they are related,” he said. “We had our fair share of that in Sri Lanka for 10 years.”
As part of a strategy of tapping demand in secondary cities such as Dusseldorf and Hamburg inGermany, Emirates will select a new French destination from Lyon, Nice, Marseille and Toulouse, operating five to seven flights a week, Clark said.
In the U.K., where Emirates serves London Heathrow, Birmingham, Manchester, Newcastle upon Tyne and Glasgow, there’s the possibility of it adding a further destination which “could be north of the border or further west,” he said.
“Though Parco has shut down for annual maintenance, it has a stock of jet fuel which it is refusing to supply to PSO,” an official of the Ministry of Petroleum and Natural Resources said.
Pak-Arab Refinery Company (Parco) has stopped jet fuel supply to Pakistan State Oil (PSO), raising the spectre of a fuel crisis on airports of Punjab in the next few days.
“Though Parco has shut down for annual maintenance, it has a stock of jet fuel which it is refusing to supply to PSO,” an official of the Ministry of Petroleum and Natural Resources said, quoting a letter written by PSO to Petroleum Secretary Ijaz Chaudhry.
In the letter sent on March 19, PSO warned that if the current situation persisted, Punjab airports would have no fuel in the next two days.
PSO, a public sector company which supplies fuel to different sectors, asked the secretary to intervene and get jet fuel supply restored. “At present, Lahore, Multan and Faisalabad airports are facing fuel shortage because of suspension of oil supply,” the ministry official said.
Talking to The Express Tribune, a Parco spokesman said the company had stock at hand and would release it shortly. “We are supplying oil according to the business requirements of our customers. The annual shutdown was planned and the petroleum ministry and oil companies had been taken into confidence,” he said.
Parco is a joint venture between Pakistan and Abu Dhabi with 60% and 40% stakes respectively. Though the government of Pakistan is a major shareholder in the company, the Abu Dhabi government has exercised control over it.
According to the ministry official, Parco closed for annual maintenance on March 15 and had stock of 9,000 tons of jet fuel. “Parco had committed to providing jet fuel by the first week of April to meet the needs of airports in Punjab, but it stopped supply and demanded payment of dues,” the official said. According to estimates, PSO has to pay Rs30.2 billion to Parco.
A PSO official told The Express Tribune that the company had placed an import order for 25,000 tons of jet fuel, which would arrive on April 2. In February, it had also imported 25,000 tons. “Export of jet fuel to Afghanistan has also been suspended and we have consumed the whole quantity of imported fuel to meet domestic needs,” the official said.
“We are keeping a stock of petrol and high-speed diesel through imports, but there are problems in case of jet fuel for Punjab airports due to suspension of supply by Parco,” the official said.
PSO meets requirements of Karachi airport with the help of imports. On Tuesday, the government released Rs5 billion to PSO. On March 21, PSO had to receive Rs176 billion from its clients, and was to pay Rs163 billion to domestic and international fuel suppliers.
Published in The Express Tribune, March 22nd, 2012.
Cape Town - The International Air Transport Association (Iata) on Tuesday downgraded its outlook for the industry for 2012, primarily due to rising oil prices.
Iata has downgraded its global profit expectations for airlines to $3bn on the back of an expected average oil price of $115 per barrel, up from a previous forecast of $99.
African carriers are still expected to see losses of $100m, which is unchanged from the previous forecast made in December.
Some of the region's economies are growing strongly and generating expanding demand for airlines. However, average passenger and freight load factors are low, making it difficult to offset the rise in fuel costs.
“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 $3.0bn," said Tony Tyler, Iata director general and CEO during an industry forecast press conference.
'Could have been worse' Tyler said the downgrade could have been worse if the eurozone crisis had deepened and the US economy had not improved. A stabilisation in the cargo market had also helped the forecast.Airline performance is closely tied to global gross domestic product (GDP) growth. Historically, when this drops below 2.0% the global airline industry returns to a collective loss.
"With GDP growth projections now at 2.0% and an anaemic margin of 0.5%, it will not take much of a shock to push the industry into the red for 2012," said Tyler.
The major driver of reduced profitability is rising oil prices. In December 2011, the consensus forecast for 2012 was $99/barrel for Brent crude.
The average price year-to-date is approaching $120 and the consensus forecast for the year has been revised to $115. This will push fuel to 34% of average operating costs. Total industry capacity is expected to grow by 3.2%, while passenger demand is expected to increase by 4.2%.