Airlines face sting in the tail from cheaper oil

BEIJING (Reuters): Fresh fears over the global economy could unravel the benefit of cheaper oil prices and keep a lid on financial forecasts for the airline industry when its chiefs gather in China for their annual summit.

An eight percent drop in oil prices this year has delivered a quick fix to an industry severely damaged by record fuel costs - but the main reasons for the drop, Europe’s debt crisis and a slowdown in China’s economy, cast a shadow over its recovery.

“The reduction in fuel prices is a great thing for the airline industry but they are coming down because of concerns over world economic activity,” said Tony Tyler, Director General of the International Air Transport Association (IATA).

“If the world enters an economic slump, that will be even worse for the industry than the higher fuel price was on its own,” said Tyler as heads of most of the world’s airlines flew into Beijing for a three-day annual meeting starting on Sunday.

IATA, whose 240 members account for 84 per cent of world air traffic, is expected to leave its overall industry profit forecast broadly unchanged at the 10-12 June meeting.

But a breakdown of the widely watched forecast is likely to reflect widening regional disparities as Europe’s debt crisis shows no signs of abating and trade shifts to the Middle East.

Global airline industry profits halved in 2011 to $7.9 billion and are expected to halve again this year.

In March, IATA predicted global airlines would make a profit of $3 billion in 2012, based on an average Brent crude price of $115. The benchmark North Sea price is now below $100.

Tyler said the latest update would balance eurozone and oil price risks against the positive effect of robust traffic, which rose 7.1 per cent in the first four months of the year. A recent slump in cargo markets has meanwhile bottomed out.

Airline traffic traditionally tracks the wider economy.

A surprise interest rate cut by host nation China on Thursday – its first since the global financial crisis of late 2008 – highlighted the meeting’s uncertain economic backdrop.

Spain’s mounting bank crisis and poor eurozone demand meanwhile hit Europe’s shares and single currency on Friday.

“As China slows, that affects everybody. Europe is in a dire state and although traffic there has held up, I think we are coming to an end of that,” said Peter Harbison, Executive Chairman of the Centre for Asia Pacific Aviation.

China is the world’s fastest-growing aviation market. Traffic at Beijing Capital airport has trebled in the past decade and now ranks second in the world.

The IATA event, which includes dinner for delegates in the Great Hall of the People, brings together the haves and have-nots of an industry that has seen a marked shift of power towards Gulf carriers from loss-making standard bearers in Asia and Europe.

IATA says 80 percent of a recent pick-up in cargo demand has been taken up by Middle East carriers, while on the passenger side many traditional carriers are struggling to protect premium traffic and make money from their international operations.

Australia’s Qantas Airways warned this week of its first annual net loss since it was privatized in 1995, blaming international weakness, poor demand and high fuel costs.

“There is a very substantial diversion of traffic through the Middle East that is hurting other regions,” Harbison said.

Gulf carriers led by Dubai’s Emirates have invested massively in wide-body aircraft in the past decade to establish the region as a long-distance hub.

Beneath passengers’ feet, that has also resulted in big increases in capacity for cargo in the bellies of the same jets.

Analysts say U.S. carriers are emerging from years of restructuring and bankruptcy filings comparatively healthy, if a lot leaner, as they continue to drive down capacity so that they can fly their planes fuller and simultaneously hold up fares.

Airlines may use the meeting to keep up attacks on European Union plans to curb emissions by forcing them to take part in a carbon trading scheme, though behind the scenes experts say that still very tentative efforts are under way to find a compromise.

The EU says the scheme is necessary to meet pollution targets in the absence of a better global framework.

China and others insist the plan infringes their sovereignty because it applies to airspace outside the EU. Some airlines have been ordered by their own governments to ignore the EU law ahead of an April 2013 deadline for full compliance.

“The situation is deteriorating into a difficult one,” Tyler said.