March 20th, 2012
06:12 PM GMT
London (CNN) – For the airline industry, it seems barely does one crisis subside than the next rears up. No sooner has the European debt debacle gone to the back-burner - taking away one of the biggest threats to economic growth - than oil price rises become a concern. And it's a worry as big, if not bigger, than the debt crisis.
All the forecasts have been done on the basis of $99 to $100 per barrel of oil. Prices are now more than $120 for Brent and that is hitting airlines hard. For most airlines, more than 30% of revenues are now going on fuel. In some cases, it is the single biggest component.
Tony Tyler, head of IATA, the organization representing aviation, describes airlines as “weak but still profitable.” With prices for oil having risen more than 30% he says airlines are suffering a “double hit.” As ticket prices go up, people travel less. There is a “hit to the revenue line and the cost side,” he notes.
Which is why IATA has downgraded profits for the industry by $500 million to $3 billion in 2012. The $3 billion figure may sound a lot - until you realize it is against revenues of $630 billion. In other words, it's a margin of just 0.5%. By any definition that is a pathetic return on capital, resources and investment.
As Tyler puts it, “a small shock will mean losses across the globe." No individual airline is immune from this; even the gulf carriers, often (inaccurately) said to benefit from cheap fuel. Most times they pay the going rate like everyone else. And everyone has to fill up their planes overseas; you can’t tanker vast quantities of fuel to get there and back on longer routes.
The airline industry is being hit by taxes on tickets, high fuel prices and for flights to Europe by the Emissions Trading System. No wonder Tyler says the industry is merely “hanging on by its fingernails, but won’t take much to send back to losses.”