Welcome to the latest edition of IATA’s quarterly eAnalyst.
The eAnalyst is designed to provide a concise and insightful guide to the current key issues in the global airline industry.
In this issue we discuss new challenges for airlines from the deteriorating business environment in late-2008. Jet fuel prices have fallen back from their July peak but the major risk now facing airlines is recession. The extraordinary partial-nationalisation of banks may ease the credit crunch but it is not clear that recession can be avoided, with severe consequences for airlines revenues.
Our survey of airline business confidence in September showed a modest improvement in expectations of profitability over the next twelve months, but this was before the financial crisis. Moreover, the survey contained some worrying signs of weakening demand prospects and falling yields.
In this environment airline managements will be trying to deal with the substantial uncertainty over revenue prospects and looking closely at the economics and financing options for aircraft replacement needs. In our Analyst Viewpoint section a hard look is taken of the outlook for air travel markets. The view is not encouraging. The extraordinary collapse of much of the banking system has far-reaching implications for aircraft finance. Proposals are made for robust techniques to assess the options for aircraft ownership or leasing in our Key Policy Issue section.
I hope you find it to be an interesting and informative read.
Brian Pearce
IATA Chief Economist
INDUSTRY PERFORMANCE AND OUTLOOK
Losses now expected to extend into 2009
With airline industry losses in the first half of 2008 in excess of $2.7 billion we stick to our forecast for full year net losses of $5.2 billion. Spot prices of fuel have fallen far more than expected. Fuel costs will be lower, but so will revenues as economies have weakened sharply over the summer months. We expect further losses of $4.1 billion in 2009. Fuel costs and capacity may be lower than expected at the time this forecast was made, but these benefits may well be offset by the sharp deterioration in the outlook for revenues.
Airline business confidence remains weak
IATA’s survey for the third quarter shows that airline business confidence continues to be weak. There was a slight improvement in expectations as a result of lower fuel prices, but the survey does not yet reflect the impact of the latest financial crisis. Less than a quarter of respondents expect higher profits in the next year and almost half anticipate a further decline. The recent fall in fuel prices will help ease cost pressures but the rapidly weakening demand environment is impeding any significant improvement in business confidence.
ANALYST VIEWPOINT
Check hatches and harnesses
by Ivan Colhoun, consultant & former Qantas chief economist
Despite recent government assistance to moderate financial market turmoil, Ivan Colhoun outlines why the world economy and the aviation industry are in for very tough times over the next few years. Just as in preparation for a landing, the call is being sounded for industry hatches and harnesses to be securely fastened.
RESEARCH TOPIC
Outlook for oil and jet fuel prices
Much of the rise and subsequent fall in oil prices during 2008 seems to have been driven by a futures market ‘bubble’ not any change in fundamentals. Now of course the prospect of recession will pull all commodity prices down further. However, in the medium-term oil prices may return to the $100 a barrel level in 2008$. One key change in the past five years has been a sharp rise in the cost of finding and extracting oil from new fields, which will determine where oil prices stabilize in the medium-term. Fuel efficiency and biofuel R&D remain critical.
KEY POLICY ISSUE
Aircraft lessor prospects and lease valuation for airlines
by William Gibson, AirBusiness Academy
Over the medium term one of the primary stresses caused by the credit squeeze will be the capacity of operating lessors to finance deliveries. The operating leasing model involves the lessor accepting the risk of aircraft residual values, a risk which airlines pay for through higher funding costs implicit in the operating lease payments. This article by William Gibson considers different leasing valuation techniques which airlines can use to assess the risks and rewards of aircraft financing alternatives.
DATA UPDATE
Custom analysis and statistical services
Leave the data compilation up to us. IATA statistical services gives you more time to analyse results and trends. We provide customised analysis and build individually tailored reports to meet your unique requirements for monitoring trends, identifying market opportunities or benchmarking. Our wealth of information allows us to prepare custom reports for Governments, International Organizations, consultancy firms, financial institutions and others.