Oil prices to hit African airlines hard

21 March 2012, 04:03

http://www.fin24.com/Companies...rlines-hard-20120320

Oil price to hit African airlines hard
Mar 20 2012 15:03James-Brent Styan

Cape Town - The International Air Transport Association (Iata) on Tuesday downgraded its outlook for the industry for 2012, primarily due to rising oil prices.

Iata has downgraded its global profit expectations for airlines to $3bn on the back of an expected average oil price of $115 per barrel, up from a previous forecast of $99.

African carriers are still expected to see losses of $100m, which is unchanged from the previous forecast made in December.

Some of the region's economies are growing strongly and generating expanding demand for airlines. However, average passenger and freight load factors are low, making it difficult to offset the rise in fuel costs.

“2012 continues to be a challenging year for airlines. The risk of a worsening eurozone crisis has been replaced by an equally toxic risk — rising oil prices.

"Already the damage is being felt with a downgrade in industry profits to $3.0bn," said Tony Tyler, Iata director general and CEO during an industry forecast press conference.

'Could have been worse'

Tyler said the downgrade could have been worse if the eurozone crisis had deepened and the US economy had not improved. A stabilisation in the cargo market had also helped the forecast.

Airline performance is closely tied to global gross domestic product (GDP) growth. Historically, when this drops below 2.0% the global airline industry returns to a collective loss.

"With GDP growth projections now at 2.0% and an anaemic margin of 0.5%, it will not take much of a shock to push the industry into the red for 2012," said Tyler.

The major driver of reduced profitability is rising oil prices. In December 2011, the consensus forecast for 2012 was $99/barrel for Brent crude.

The average price year-to-date is approaching $120 and the consensus forecast for the year has been revised to $115. This will push fuel to 34% of average operating costs. Total industry capacity is expected to grow by 3.2%, while passenger demand is expected to increase by 4.2%.