Fuel prices drain airlines? profit buffer

Fuel prices drain airlinesÆ profit buffer    The International Air Transport Association (IATA) on Monday downgraded its 2011 airline industry profit forecast to $4 billion, 54 percent lower than the $8.6 billion profit forecast in March and a 78 percent drop compared with the $18 billion net profit recorded in 2010.
   'Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations to $4 billion this year,' said Giovanni Bisignani, IATA's director general and chief executive officer. 'That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance. The efficiency gains of the last decade and the strengthening global economic environment are balancing the high price of fuel. But with a dismal 0.7 percent margin, there is little buffer left against further shocks.'
   IATA is projecting revenue of $598 billion, which would yield a 0.7 percent margin.
   The cost of fuel is the main cause of reduced profitability, IATA said.
   'The average oil price for 2011 is now expected to be $110 per barrel, a 15 percent increase over the previous forecast of $96 per barrel,' the association said. 'For each dollar increase in the average annual oil price, airlines face an additional $1.6 billion in costs. With estimates that 50 percent of the industry's fuel requirement is hedged at 2010 price levels, the industry 2011 fuel bill will rise by $10 billion to $176 billion. Fuel is now estimated to comprise 30 percent of airline costs — more than double the 13 percent of 2001.'

Bisiganni

   Bisignani said airlines can be profitable at higher fuel cost levels than from a decade ago.
   'We have built enormous efficiencies over the last decade, he said. 'In 2001, we needed oil below $25 per barrel to be profitable. Today, we are looking at a small profit with oil at $110 per barrel.'
   IATA added this fuel price spike is 'substantially different from the one that occurred in 2008. First, while oil inventories are low, there is substantial spare OPEC and refinery capacity, which was not the case three years ago. Second, the monetary expansion that fueled a surge in financial investments in commodities is ending, which will remove a major upward pressure on fuel prices. Nonetheless, volatility in the fuel prices remains one of the industry's major challenges.'