Fuel anxiety shrinks profit margins

THE International Air Transport Association (IATA) is reducing its forecast for 2012 due to the rising cost of fuel.

IATA now expects airlines to make a global profit of only $3bn this, with a profit margin of a paltry 0.5 per cent. This is $500m less than the December forecast when oil was forecast at $99. It now tops $125 a barrel.

Increasing disruptions to the supply of oil from Iran, South Sudan, Syria and Yemen have inflated oil prices this year, with Brent rising 16 per cent. Crude recently rose $2 a barrel following news of western states’ sanctions against Iran over it disputed nuclear programme.

Factors that prevented a worse forecast from IATA include the lessening of the Eurozone crisis, an improving US economy, general cargo stabilisation and slower than expected capacity expansion.

Airline performance is closely tied to global gross domestic product (GDP) growth. Historically, when GDP growth drops below two per cent, the global airline industry returns a collective loss. “With GDP growth projections now at two per cent and an anaemic [profit] margin of 0.5 per cent, it will not take much of a shock to push the industry into the red for 2012,” says Tony Tyler, IATA’s director general.