Oil Price Threatens to Erase Airline Profit, IATA Says

Oil prices at current levels will increase airline costs by more than this year’s projected earnings, threatening the industry’s return to profitability, the International Air Transport Association said.

IATA on Dec. 14 forecast carriers would log net income of $9.1 billion in 2011 based on oil at $84 a barrel. With crude trading $7 higher than that and every $1 increase boosting the fuel bill by $1.6 billion, costs could increase by $11 billion.

“The story this month is the sharp rise in oil prices,” IATA Chief Executive Officer Giovanni Bisignani said in a statement, adding that a sustained increase “could spoil the party” even as people start to travel again after the recession, eroding a 2.7 percent profit margin he described as “pathetic.”

Airlines posted earnings estimated at $15.1 billion last year as international passenger traffic jumped 8.2 percent, outstripping a 4.4 percent rise in capacity so that planes flew more than 78 percent full, IATA said. Freight demand increased by almost 21 percent as economic growth picked up.

Crude oil futures were trading as high as $91.32 on the New York Mercantile Exchange today. Buying kerosene accounts for 27 percent of an airline’s operating costs, according to IATA.

Hedging, Surcharges

Airlines seek to guard against rising fuel expenses by hedging at a set price on part of their annual requirement. Network carriers such as Air France-KLM Group, the biggest in Europe, also seek to pass costs from unhedged fuel to customers through a system of predetermined surcharges, though that can deter travel if ticket prices increase too much.

United Continental Holdings Inc., the world’s largest airline, may need to cut flying this year if fuel stays at current prices, CEO Jeff Smisek told investors on Jan. 26.

The air-travel rebound slowed in December as snowfalls in Europe and North America disrupted flights. Traffic grew 4.9 percent, down from 8.2 percent the previous month, with the wintry weather cutting demand by 1 percentage point, IATA said.

The December gain was led by a 14 percent increase in the Middle East and a 12 percent jump in Africa, it said. Passenger volumes are now 4 percent higher than the pre-recession levels of early 2008. While freight is 1 percent higher, cargo tonnage has fallen 5 percent since a post-slump restocking boom in 2010.

“The challenge is to turn the demand for mobility into sustainable profits,” Bisignani said.

Airports Council International said yesterday that terminals handled 3.37 billion passengers last year, an increase of 6.2 percent compared with 2009. The Asia-Pacific region led the growth, reporting a 12.3 increase of passenger numbers, with North America having the slowest at 2.2 percent.

“2010 was a banner year for air traffic, generating a much quicker recovery than expected,” Andreas Schimm, ACI’s economics director, said in the statement. “Nonetheless, the industry needs to remain vigilant, as setbacks can occur unexpectedly.”

To contact the reporter on this story: Steven Rothwell in London at srothwell@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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