Oil Costs and Taxes Emerging Concern for Airlines

By: George Dooley

Travel Agent

International scheduled traffic results for January show an 8.2 percent increase in passenger traffic and 9.1 percent growth in air freight compared to January 2010, according to the International Air Transport Association (IATA). IATA said it is watching closely as events unfold in the Middle East and that the region’s instability has sent oil prices skyrocketing.

“We begin the year with some good news. January traffic volumes are up—8.2 percent on January 2010 and 2.6 percent on December. With most major indices pointing to strengthening world trade and economic growth, this is positive for the industry’s prospects. But we are all watching closely as events unfold in the Middle East. The region’s instability has sent oil prices skyrocketing. Our current forecast is based on an average annual oil price of $84 per barrel (Brent). Today the price is over $100. For each dollar it increases, the industry is challenged to recover $1.6 billion in additional costs. With $598 billion in revenues, $9.1 billion in profits and a profit margin of just 1.5 percent, even with good news on traffic 2011 is starting out as a very challenging year for airlines,” said Giovanni Bisignani, IATA’s Director General and CEO.

By January 2011, air travel volumes were 18 percent higher compared to the low point reached in early 2009 and some 6 percent above the pre-recession peak of early 2008. The 8.2 percent growth in passenger traffic shows a recovery from December’s slowdown (with 5.4 percent growth) that was related to severe weather in Europe and North America which reduced total traffic by 1-2 percent.
Passenger load factors are high, IATA reports, but there is evidence that supply growth is beginning to run ahead of demand. Compared to the previous January, the 8.2 percent demand increase was outstripped by a 9.1 percent increase in capacity, resulting in an average load factor of 75.7 percent. Adjusting for seasonality this is equates to a 77.7 percent load factor. This is a 1.1 percentage point drop from the October 2010 peak.

North American carriers recorded an 8.7 percent year-on-year growth in demand and a 10.0 percent increase in capacity in January. This imbalance saw load factors slip by nearly a full percentage point to 77.2 percent. International passenger traffic carried by North American airlines has now recovered to 2 percent above its pre-recession peak of early 2008, IATA said.

“As if the rising price of oil was not challenging enough, governments are increasing the cost of mobility with a growing contagion of taxes. In 2010 the industry was hit with billions of dollars of new or increased taxes in the UK, Austria and Germany. Now we see South Africa and Iceland planning increases. Governments need to improve their finances and restart their economies. Mobility is a catalyst for economic growth. Governments must understand that taxing air transport out of the range of price sensitive travelers and businesses makes very little economic sense,” said Bisignani.

IATA’s forecast for 2011 was made in December 2010 and anticipates an industry profit of $9.1 billion or a 1.5 percent net profit margin on $598 billion in revenues. This is based on an average annual oil price of $84 per barrel, a demand increase of 5.3 percent, flat cargo yields and a 0.5 percent increase in passenger yields. IATA said it will revise its forecast on March 2.

Visit www.IATA.org.

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