Airline losses head for $8 billion, IATA warns of trouble for plane makers

The International Air Transport Association (IATA) says it now expects airlines to post losses of at least $8 billion for the 2008 calendar year. That is up from its December prediction of $5 billion.
“Airline losses have been larger than expected in the fourth quarter (Q4) of 2008, totalling around $4 billion so far, with large losses now being reported by Asian and European airlines,” IATA says in their latest financial forecast.
“Unlike earlier in the year airlines are now losing money at the operating level.
“Given these larger Q4 losses our December forecast for $5 billion net losses in 2008 looks low”.
The dire forecast comes days after IATA director general and CEO Giovanni Bisignani predicted major aircraft manufacturers Airbus and Boeing will fail to deliver more than half of the aircraft they will produce this year.
Bisignani, who spoke to reporters late last month after making a speech at the Wings Club in New York, said IATA members were struggling to secure financing for their 2009 deliveries in the current environment. For many it also no longer made commercial sense to take delivery of additional aircraft, Flight Global reports.
He calls his prediction that Airbus and Boeing will deliver “less than half” of the aircraft they are planning to produce this year “a guess” based on “a perception” he has of the current situation. But he acknowledges he has had conversations with several airline CEOs who have confessed that they do not think they will be able to take delivery of all the aircraft they are scheduled to take in 2009.
Glight Global adds “this perception” that Airbus and Boeing will fail to deliver more than half of the aircraft produced this year “can easily change” if there is an improvement in economic conditions, the financial markets or airline traffic. But so far there are no signs of any improvement or an indication the bottom is approaching, the straight-talking IATA boss says. 
“I’m a Catholic priest. I know all the sins but can’t tell,” Bisignani said.
If his prediction comes to pass it would have a serious effect on South Africa`s aviation industry ambitions as well as on the revenue of local companies that form part of the Airbus and Boeing supply chain.  
The IATA update adds equity markets fell further during February with airline stocks particularly heavily hit in the US, “where the Bloomberg airlines index was down 28% during the month and down 42% since the start of the year.”
The association`s economists note financial markets appear to have downgraded their assessment of US airline prospects as a result of the deepening of the recession. Airline stocks in Europe and Asia were hit less, down 3% and 2% during February. Worldwide airline stocks fell 7%. European airline equity prices are now 20% down on the start to the year.
Good news is that crude oil prices appear to have formed a floor just above $40 a barrel, following OPEC`s 4mb/d output cuts in December and the recent series of bank and economic bailout packages. “As falling demand eases refineries bottlenecks the ‘crack spread` has narrowed to more normal levels and jet fuel prices have fallen towards $50 a barrel. Unfortunately, many airlines have part of their fuel bill partly locked, through hedging, into higher prices. Hedging losses were a large part of the larger than expected reported Q4 losses,” the report adds.
Air freight volumes remained at extremely low levels in January, down 23.2% on the year, after the precipitous collapse in November and December. Manufacturers are struggling to reduce a very large end-year build up of inventory, relative to sales, which has cut shipments and air freight. There are early signs of this process levelling out but as yet no recovery is in sight. Passenger travel has been falling at a slower trajectory but nonetheless, at 5.6% down on a year ago, is very weak.
IATA says airlines are responding to the slump in demand by trying to shrink capacity to match. So far, with the exception of US domestic markets, they have been unsuccessful.
September marked the turning point on international markets, since when airlines have steadily reduced capacity. In January capacity was down 2% on the year, with cuts ranging from a 4.3% reduction by Asia-Pacific airlines to an increase of 10.8% in the Middle East
Load factors have been falling sharply since September, as airlines have found demand falling away faster than they have been able to cut capacity. In January average load factors were 2.8% points below the level of the previous year. The largest falls in utilisation are being suffered by the Middle Eastern airlines, where a 10.8% expansion in capacity led to a 5.4% fall in load factors, and by Asia-Pacific airlines who cut capacity, but the 8.4% fall in demand forced their load factors down 3.3% points in January.
After lower fuel costs brought a few older aircraft out of storage in December, airlines put another 73 aircraft into storage in January and retired 26 older aircraft. With deliveries of 93 new aircraft that means the size of the fleet was reduced further in January. Capacity is being cut even more by reductions in aircraft utilisation by frequency and destination cuts. In the past 5 months 632 older aircraft (2-3% of the fleet) have been taken out of service, replaced by 441 new aircraft.