2008 Business Travel Survey: International Carriers See Demand Softening

The largest international airlines outside of the United States last year generated the highest passenger revenues in years and netted annual profits. However, like their U.S. counterparts, this year they are experiencing a deteriorating operating environment, due to the rise in fuel costs and slowing passenger demand.

In its most recent quarterly survey of major airline chief financial officers, the International Air Transport Association in April showed confidence in the airline business at its lowest point since the index was established in 2005. About half of IATA airline CFOs forecasted dwindling profits in the first three months of 2008, and more than 61 percent "expected profitability to deteriorate further over the next 12 months," citing concerns on fuel prices and weaker demand.

IATA director general and CEO Giovanni Bisignani said worldwide carriers had grown more efficient since 2001—with productivity improving, non-fuel costs trimmed by 18 percent and year-over-year traffic improvements growing by 7.4 percent last year alone. Despite those gains, the economic environment is worsening and most major carriers across the globe are left with little fat to trim.

"Oil prices continue to rise," Bisignani said. "Demand is softening and after the 64 percent improvement in labor productivity and an 18 percent reduction in non-fuel unit cost attained since 2001, efficiency gains are much more difficult to achieve."

IATA expects the global industry to lose $2.3 billion this year, based on oil prices of $106.50 per barrel. However, the association at its annual conference this month said losses could go up to $6.1 billion "if we see $135 oil for the rest of the year," Bisignani said. IATA's forecast released this month is a sharp revision of its March outlook, which targeted a $4.5 billion global industry profit.

"For every dollar that the price of fuel increases, our costs go up by $1.6 billion," Bisignani said.

Although IATA said most carriers are basing their downward revisions of profitability largely on the growing cost of fuel, many carriers operating overseas have been sheltered from the magnitude of fuel costs experienced by U.S. carriers.

While fuel prices continue to reach new peaks this year, the weakness of the dollar—the currency in which oil and jet fuel are purchased—has created a buffer for carriers operating on the other major world currencies, which last year maintained significant strength against the dollar.

U.S. Air Transport Association chief economist John Heimlich in a presentation last month said the dollar-euro exchange rate has boosted fuel price differential to greater than 57 percent, mimicking the equivalent of a $63 savings when carriers purchase fuel in euros, based on fuel prices in May.

IATA in an industry outlook released in April said, "There is little expectation of any major relief in terms of a fall in the oil price in the next 12 months. Financial hedging and, for non-U.S. airlines, a depreciation of the U.S. dollar can help to offset, at least temporarily, some of the higher costs, but most of the upward cost pressure is beyond the control of airlines."

In its most recent international traffic overview, released in May, IATA said passenger traffic continued to grow this year, though it is growing at a slower rate than in 2007. IATA said March passenger demand increased nearly 6 percent, though after adjusting for the Easter holiday period, IATA said real traffic growth was 4 percent, continuing a "sharp downward trend" in demand growth established in December 2007.

Even in such growth markets as Asia and the Middle East—which have seen major demand spikes in the past year—IATA said traffic is slowing.

IATA said European carriers witnessed 3.7 percent growth in traffic in March, while Asia/Pacific carriers saw traffic move 4.3 percent higher and Middle East carriers "saw a double-digit increase of 15.4 percent, reflecting the expanding economies in the region, but even this is a significant downward step from the 20.4 percent recorded in 2007," IATA said.

IATA showed Latin American carriers as the only global airlines to experience a higher rate of growth this March at nearly 20 percent.