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Oil prices expected to hit airlines hard: trade group

Soaring fuel prices and slowing economic growth are likely to wipe out much of the airline industry's profits next year, despite steady increases in global demand for air travel, the International Air Transport Association, a leading trade group, said on Wednesday.

Analysts said the expected slowdown could increase pressure on less-profitable carriers, particularly in the US, to merge.

With oil prices hovering in a range of US$90 to US$100 a barrel, the association cut its forecast for next year's industry profits by more than one-third to US$5 billion, down from the US$7.8 billion it predicted in September.

It was the industry's second sharp earnings revision in less than six months; in June it issued a forecast of US$9.6 billion in profits for next year.

"The peak of the business cycle is over and we are still US$190 billion in debt," said Giovanni Bisi-gnani, the association's director general. "So we could be heading for a downturn with little cash in the bank to cushion the fall."

Airline earnings have improved strongly this year after six unprofitable years in the wake of the terrorist attacks of Sept. 11, 2001. Aggressive efforts to cut costs have reduced nonfuel expenses by 16 percent since 2001 and for the first 10 months of this year passenger traffic rose 7.3 percent from the period a year earlier.

The association said that indicated that demand remained robust in most regions. But the increasing risk of a sharp economic downturn in the US threatens to limit spending on air travel, particularly among business passengers.

In a report accompanying the revised forecast, the association's chief economist, Brian Pearce, wrote: "Economic growth and airline revenues have been holding up well during 2007, helping to offset fuel costs and boost airline profitability."

He predicted, however, that "revenue support will drop away during 2008 as the US economic slowdown directly restricts air travel growth and has knock-on effects on linked economies and travel markets."

Pearce said air traffic in Asia, particularly in China, was likely to grow unabated and to slow only slightly in Europe.

North American carriers were likely to see the biggest drop in profit, down nearly 19 percent next year to US$2.2 billion, from a forecast of US$2.7 billion this year. With 35 percent of their fleets more than 25 years old, US carriers were expected to be hurt most by higher fuel costs because older planes can be 30 percent to 40 percent less fuel-efficient than newer aircraft. The US domestic market represents about 30 percent of global air traffic.

The air transport association's revised profit outlook is based on a price forecast for crude oil next year of US$78 a barrel on average, well above the US$67 average price it forecast in September. The group said it expected fuel to represent 30 percent of total operating costs, up from slightly more than 10 percent in 1997.

Most US airlines remain heavily in debt, making them particularly vulnerable to swings in fuel prices or the effects of an economic downturn.

"This industry is so highly leveraged that you don't need a big change in one factor to have a significant impact on profitability," said Lloyd Brown, an airline industry analyst at Ernst & Young in London.
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