Downturn in 2008
The new industry financial forecast of the International Air Transport Association (IATA) estimates a global industry profit of US$5.6 billion in 2007 falling to US$5 billion in 2008

The IATA outlook for global aviation industry profit is unchanged for 2007 at US$5.6 billion. Higher oil prices (full-year average forecast of US$73 per barrel) were offset by strong traffic growth (5.9 per cent for passenger traffic) and even stronger revenue growth of 8.4 per cent.

“For the first time since 2000, we are profitable. That is good news, representing a lot of hard work by airlines. Since 2001, non-fuel unit costs dropped 16 per cent, labour productivity is up 64 per cent and sales and marketing unit costs decreased 25 per cent. But with a 1.1 per cent margin, the bottomline is still peanuts,” said Giovanni Bisignani, IATA’s Director General and CEO.

IATA sharply revised downward its outlook for 2008 to US$5 billion from the previously forecast US$7.8 billion. The spike in fuel prices is expected to add US$14 billion to the industry fuel bill, driving it up to US$149 billion (based on an average price of US$78 per barrel). The broadening impact of the credit crunch is expected to slow revenue growth to 4.7 per cent and traffic growth to 4 per cent. Simultaneously, capacity expansion is expected to accelerate in 2008, with an increase in aircraft deliveries to 1,281 (up from 1,041 in 2007).

“The challenges get tougher in 2008. A favourable economic environment and effective efficiency measures helped mitigate the impact of high fuel prices and underpinned profitability improvements. With the credit crunch, that is changing. The peak of the business cycle is over and we are still US$190 billion in debt. So we could be heading for a downturn with little cash in the bank to cushion the fall,” said Bisignani. While leading in absolute profitability in both 2007 and 2008, North American carriers will see the largest fall in profitability from US$2.7 billion in 2007 to US$2.2 billion in 2008. With 35 per cent of the fleet over 25 years old, the impact of high fuel prices is greater here than in other regions. Moreover, the region is at the centre of the credit crunch.

Efficiency is key
European and Asian carriers will see minor drops in profitability of US$100 million each to US$2 billion and US$600 million, respectively. Robust traffic growth to and within Asia is expected to partially insulate carriers from the impact of the crunch. Middle East will remain stable at US$200 million supported by ambitious route expansion. Latin America is the only region to see profitability improve by US$100 million to breakeven in 2008. This is largely the result of industry re-structuring. Africa will be the only region reporting a loss – of US$100 million last year and this year.

“The common theme globally is the need for efficiency. IATA’s ‘Simplifying the Business’ programme is delivering critical efficiencies from e-ticketing to e-freight. In 2008, IATA will launch three major initiatives that will cut costs and improve service,” said Bisignani.

“We will further revolutionise the travel experience with expanded self-service options to give passengers more control over their journeys. The new strategy is built around the success of the ‘Common-Use Self-Service Kiosk’, already operating at 83 airports around the world. Better baggage management will help mitigate the US$3 billion in annual costs from the 1.8 per cent of bags that are mishandled. And the IATA safety audit for ground operations will help reduce the US$4 billion annual cost of ground damage,” said Bisignani.

Bisignani on environment:
Our biggest new challenge is the environment, specifically aviation’s role in climate change. What is the issue? Aviation is 2 per cent of global carbon emissions. We are growing by 5 per cent a year and efficiency measures limit the growth in our carbon footprint to 3 per cent. But a growing carbon footprint is not acceptable for any industry. IATA’s four-pillar strategy addresses climate change:

• Invest in new technology

• Build and operate efficient infrastructure

• Fly planes effectively

• And once we have achieved all of that, consider economic measures from tax credits for re-fleeting to offset programmes and emissions trading.

The strategy is producing results with shorter routes, best practices in fuel management and better operational procedures. IATA achieved up to 15 million tonnes of CO2 saving in 2006 and in 2007 we achieved a further 10 million tonnes in savings. Within this, route improvements are playing a major role–350 routes in 2006 saved 6 million tonnes of CO2. We expect 4 million tonnes of savings from 357 routes in 2007.

Aviation is committed to doing much more. In June, I announced a 50-year vision for air transport, to achieve carbon neutral growth leading to a zero emission, carbon-free future. We are actively working with our partners to make this a reality. I am confident that aviation will be the benchmark for all industries on environmental performance. We can only achieve this if governments support global solutions. So, we took our strategy and goals to ICAO, where all member states endorsed the IATA strategy and our interim fuel efficiency target to achieve a 25 per cent improvement in fuel efficiency by 2020. Moreover, ICAO invited IATA to lead an expert group to map out the options to achieving carbon neutral growth and to develop a strategy to guide the efforts of governments, airlines and manufacturers.

The big disappointment was Europe, which supported the global strategy but is taking a unilateral approach to emissions trading that is irresponsible and politically motivated and I would add, hypocritical. Achieving a Single European Sky would save 12 million tonnes of CO2 a year but Europe has been dragging its feet for nearly two decades. We have had enough of hot air – it’s time for political will and action!

Let’s remember that emissions trading is not a solution for reducing emissions, it is a multi-billion dollar stick. But politicians forget that our US$149 billion fuel bill is the biggest financial incentive of any industry to improve environmental performance and unilateral application of ETS is a breach of the Chicago Convention. I fully support any challenges by states including the US at ICAO, WTO or elsewhere.

Let me be absolutely clear – we are prepared to accept economic measures as a political reality but they must be implemented as a global scheme that is fair and voluntary. In fact, our Board mandated us to work on a voluntary carbon offset scheme with a common emissions calculator and globally credible standards. We are working with the leading groups in the environmental lobby on this and eventually we may develop a global voluntary carbon offset scheme for any airline to participate in.

But we must also keep focused on our ultimate goal – zero carbon emissions. Economic measures will not achieve it. Only technology can bring us to zero emissions. Some potential building blocks for a carbon-free future are here today; solar power, bio-fuels and fuel cells. The manufacturing community backs the vision from Airbus and Boeing to GE, Pratt & Whitney and Rolls Royce and also our fuel suppliers. Nobody has all the answers, but let’s remember that we went from the Wright Brothers to the jet engine in 50 years. And today – 50 years after that – we are a safe global mass transport system for 2.2 billion passengers with commitment and common goals. I am convinced that a carbon-free future is absolutely possible.

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