The Risks to Our Profit Forecast for 2011 Are Very Real
By Giovanni Bisignani Director General and CEO, IATA
Shocks dominated the first quarter of 2011. The first was political unrest in the Middle East that knocked 1% off global demand in February. Then came the enormous human tragedy of the Japanese earthquake, tsunami and nuclear crisis. Airlines responded by maintaining vital links to Japan that transported relief supplies and workers. The economic cost of this triple blow will unfold over the coming months. As Japan accounts for $62.5 billion—or 10%—of industry revenues, the impact will be significant.
Skyrocketing oil prices that followed military intervention in Libya are having an even bigger and more immediate impact on the industry. The first quarter ended with an average oil price of $106 per barrel. That’s a 33% increase on the $79.4 average for last year. Fuel already accounts for about a third of an airline’s cost structure and each dollar increase in the price of oil challenges airlines to recover $1.6 billion in added costs.
Careful capacity management, more efficient flying, and a recovering global economy are among the factors helping airlines to deal with their ballooning fuel bill. But the looming danger is that higher oil prices slow or stop the economic expansion.
The risks to our $8.6 billion profit forecast for 2011 are very real. But this challenging start to the year also illustrates a longer-term problem. How can airlines make sustainable profits when they are constantly taking body blows from events beyond their control?
Part of the answer is driving efficiencies in areas that airlines do control. Simplifying the Business is a good example. We have delivered about $18 billion in cost savings since the program began, successfully delivering 100% e-ticketing, bar coded boarding passes and common use kiosks at airports. E-freight is taking more time because of the complexity of the supply chain, which includes governments. We have now set targets to achieve its $4.9 billion annual cost savings. By the end of this year, 10% of freight volumes will be by e-freight, reaching 100% by 2015.
Where governments are involved, change takes longer.
Airlines need the same commercial freedoms as normal businesses—to merge or consolidate across borders. Governments must take back the $7.4 billion national security cost that has been unfairly passed to the industry. And we must convince governments that excessive aviation taxes are counterproductive when the imperative is to restart their economies.
To achieve these changes we must speak loudly as a united industry that is confident in the economic and social benefits that it brings to the world. The IATA Annual General Meeting is a great platform at which to shout politely for change. I look forward to seeing you in Singapore from 5-7 June 2011.