Aviation sector to buck global trend

(DENNIS MALLARI)    
 
 

The Middle East aviation industry’s profitability is expected to remain stable this year although the global aviation industry will see a downturn, experts forecast yesterday. Worldwide, aviation profits are expected to drop from $5.6 billion to $5bn this year, the International Air Transport Association (IATA) said.


“The Middle East is able to sustain profitability levels as the region is supported by ambitious route expansion,” said Giovanni Bisignani, IATA’s Director General and Chief Executive Officer.

“We will also see the region’s capacity levels, which rest at 3.5 per cent, go up to about six per cent in the next five years. Capacity is driving revenues and profitability,” he told Emirates Business.

IATA also expects the Middle East to continue to be the fastest-growing region in the coming year. “It is starting from a small level so the absolute numbers are still low but it is still able to achieve the highest growth levels in the world,” said Brian Pearce, IATA’s Chief Economist.

Bisignani said: “The Middle East’s market share in terms of profitability rests at two per cent currently. It is expected to go up by another one or two per cent in the coming five years.”

While the region’s average annual growth rate of passenger traffic is expected to be 6.8 per cent from 2007 to 2011, cargo operations are expected to grow at five per cent. “The Middle East, developing economies in Asia and, to a lesser extent, Africa will be boosted by strong GDP growth, along with significant new capacity and new routes,” said Bisignani.

“Middle Eastern air freight is expected to show strong growth, as the region’s carriers take advantage of the strong purchasing power for the region provided by high oil prices to increase capacity on existing and new routes.”

In the Middle East, the international passenger numbers will go up to 105 million by 2011, which is an increase of 30 million over 2006 when it was 75 million.

Meanwhile, the global outlook for 2008 has weakened sharply. According to Bisignani, the $5bn projection of profit is lower than the $7.8bn mark IATA had originally anticipated. “This is due to two reasons: the growing credit crunch, and yet higher fuel prices.”

IATA expects the fuel bill to continue to rise through 2008 to just below $150bn, accounting for about 30 per cent of operating costs.

Bisignani said: “Air traffic markets are still heavily weighted towards the US, while demand for oil is shifting towards Asia. Since the credit crunch is expected to push the US economy close to recession but leave China relatively unscathed, airline revenues will slow but the demand for oil will keep fuel prices relatively high.” But minimising the impact of the downturn, Pearce said IATA expects the downturn to be short-lived. “This is a dip rather than a recession. Outside the US industry, the balance sheet is still healthy.”

Furthermore, higher oil prices (full-year average forecast of $73 per barrel) were offset by strong traffic growth (5.9 per cent for passenger traffic) and even stronger revenue growth of 8.4 per cent in 2007.

Bisignani said: “For the first time since 2000, we are profitable. Since 2001, non-fuel unit costs dropped 16 per cent, labour productivity is up 64 per cent and sales and marketing unit costs decreased 25 per cent. But with a 1.1 per cent margin, the bottom line is still peanuts.”

The spike in fuel prices is expected to add $14bn to the industry fuel bill, driving it up to $149bn (based on an average price of $78 per barrel). The broadening impact of the credit crunch is expected to slow revenue growth to 4.7 per cent and traffic growth to four per cent. Simultaneously, capacity expansion is expected to accelerate in 2008 with an increase in aircraft deliveries to 1,281 (up from 1,041).

“The challenges get tougher in 2008,” said Bisignani. “With the credit crunch, that is changing. The peak of the business cycle is over and we are still $190 billion in debt. So we could be heading for a downturn with little cash in the bank to cushion the fall.”
 
 
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