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Airlines may post US$3 billion in losses

The world's airlines' losses this year may reach US$3 billion, 36 percent more than forecast in March, as rising oil prices outstrip the benefits of economic growth and higher ticket prices, an industry group said.

The International Air Transport Association (IATA), whose 261 members represent 94 percent of scheduled air traffic, had forecast a loss of US$2.2 billion for the world's airlines.

"It's amazing that our forecast isn't worse than it is," Brian Pearce, chief economist of the Montreal-based group, said in an interview in Paris.

"It's because of the cost cuts, which have put the airlines in a really strong position, and also because we're in a really strong economic environment," he said.

The group's members as a whole haven't been profitable since 2000 when they earned US$3.7 billion. The carriers lost US$43.6 billion from 2001 through last year, IATA said, dragged down by the Sept. 11, 2001, terrorist attacks, SARS, excess capacity and rising oil prices.

IATA, whose annual meeting in Paris continues today, expects North American airlines to lose US$5.2 billion in this year. European airlines will probably earn US$1.3 billion, while Asian carriers are now expected to earn US$1.7 billion.

The more pessimistic forecast is based on Brent crude oil costing an average of US$66 a barrel compared with the US$57 a barrel on which the March projection was based. Crude oil for July delivery was at US$71.95 a barrel in London yesterday.

IATA in March forecast that airlines would post a profit of US$7.2 billion next year, based on average oil prices falling. The group today didn't make a specific projection for next year because of the uncertainty over whether the higher cost would lead to slower economic growth and a decline in demand, said IATA chief executive officer Giovanni Bisignani in an interview.

"We have to consider that traffic is booming, yields are high and load factors are at record levels," he said. "But if the fuel prices keep increasing, this rosy environment will finish quite quickly and so our optimism may also end."

Fuel costs for the world's airlines doubled from 2001 through this year to US$91 billion. IATA now expects the bill for carriers to total US$112 billion this year, with fuel rising to 26 percent of operating costs from 22 percent last year.

To combat the higher costs, airlines have used ticket surcharges, hedging, or financial contracts to lock in prices, cost cuts and use of newer, more fuel-efficient aircraft.

Bisignani says airlines until now have been able to recover about 40 percent of the higher fuel prices through hedging and another 20 percent through charges.

Air France KLM Group, Europe's largest carrier, has imposed surcharges five times in the last 18 months, with the long-haul charge now at 51 euros (US$66) a ticket. British Airways Plc last month raised the surcharge on long-haul flights by 17 percent to £35 (US$66), the seventh increase since May 2004.

Hedging has become less effective because as older financial contracts expire, new contracts are available only at higher target prices. Carriers having financial difficulties often don't hedge at all because they lack the cash or credit to buy the contracts.

AMR Corp's American Airlines chief executive Gerard Arpey said that was the case at his airline for some time.

"Regrettably, we moved away from our historic hedging program in mid-2003 because of our liquidity difficulties," Arpey said in an interview in Paris on Sunday.

"To hedge you need cash or a balance sheet," he said. "And in the dark days of 2003, we didn't have either one. Today we're in a stronger position and we're hedging again, but you can't turn the clock back, so you're now hedging in the US$60-dollar range."
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