Fuel Costs Escalate Global Airline Woes

Global airlines forecast bigger-than-expected 2006 losses on Monday as their industry leaders clashed with governments, airports and oil firms over the remedy needed for high oil prices.

The industry lobby group, International Air Transport Association (IATA), said it was lifting its estimate for global losses to $3 billion in 2006 from a previous estimate of $2.2 billion as fuel woes outpace cost-cutting efforts.

The figure still is below the loss of $3.2 billion for 2005, but IATA Chief Executive Giovanni Bisignani told the group's annual meeting in Paris that risks remained and the industry had done everything it could to slash costs.

"Oil is the wild card. Prices are racing ahead of efficiency gains and robbing our profitability," he said in a speech on the state of the industry.

"The industry fuel bill will top $112 billion this year $21 billion more than 2005," said the IATA, which represents 261 airlines handling 94 percent of the world's scheduled air traffic.

The losses contrast with record orders for new aircraft, reflecting a shift in industry power toward Asia and the Middle East where demand is strong even as several U.S. domestic airlines remain in bankruptcy protection.

Many airlines are upgrading fleets to save money on fuel.

U.S. carriers have suffered far worse than the Europeans due to slowed air travel after the Sept. 11, 2001, attacks in the United States and the rise of budget carriers such as Southwest.

Nonetheless, global revenue gains of 10 percent in each of the past three years have helped buffer airlines, as have cost-cutting efforts, which Bisignani said have reduced nonfuel costs by 13 percent overall since 2001.

"[Such] efforts have moved the breakeven fuel price from $14 per barrel to $50," he said, illustrating the dilemma for carriers with crude oil prices now above $70 a barrel and near-to-record levels.

With the breakeven point still rising, airlines could return to profit in 2007 if oil prices were to stick to an average of $66 a barrel this year, he said. But for now prices are higher.

The head of Italian oil company ENI held out little hope of significant relief anytime soon.

"We think there's a lot of oil around, and so it's possible the oil price will fall in coming months. But a lot depends on the geopolitical situation, and in any case we don't see it falling much," ENI Chief Executive Paolo Scaroni said.

The head of Airbus, Gustav Humbert, told airlines that every dollar per barrel increase in oil prices added $1.3 billion to aviation-industry costs.

Fuel is expected to make up 26 percent of airlines' average costs in 2006, against 22 percent the previous year, IATA said.

Bisignani accused oil companies of raking in $14 billion in extra refining profits without improving services.

And he told airlines that governments need to remove barriers that are holding back the sector's efforts to be more efficient.

"We have cut our labor costs by 33 percent, and last year we had the lowest accident rate in our history," Bisignani said. "The airline system is working effectively. Now it is time for others to join us with the same speed."

Bisignani noted IATA's drive to do away with paper tickets by the end of 2007 but said governments remained an obstacle to taking similar cost-saving steps in the air-freight sector.

Rising charges at airports, some of them government-owned such as in Paris, which is in the process of a partial privatization, also are a problem, he said. Airlines are incensed by French plans to tax flights to pay for aid to poor nations.

The European Union's most senior transport official, European Commission Vice President Jacques Barrot, defended the trade bloc's record on liberalization.

"The cumulative losses of international airlines in IATA in the past five years reached $42 billion, but European companies made $1.3 billion in profit last year," he told IATA members.


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