Unending turbulence in global aviation

June 14, 2012

BR RESEARCH

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From eurozone to oil shocks, the aviation industry worldwide has had a difficult time juggling crisis in the past year. Unfortunately for the industry, little seems to have been changed in 2012. The fall in crude oil prices which has in turned driven down the prices of jet fuel is not all good news. Oil prices are weaker due to turmoil in the euro area. IEA has highlighted that the oil price shave-off of around 20 percent from the CY12 highs is primarily due to the slump in Chinese growth and the muted economic growth worldwide. In its recent financial forecast, the International Air Transport Association has shown pessimism about the future of the aviation industry due to high fuel cost and European financial crisis. European airlines are expected to lose around 700 million pounds with the industry body warning that some companies could go bust. As two airlines have already gone out of business in 2012, chief economist for IATA, Brian Pearce has highlighted serious risks to the financial viability of other European airlines. Under the assumptions that the US recovery is weak, China avoids a hard landing, there is no Iran conflict, and the eurozone crisis is limited to the Greece exit, the central forecast by IATA is eerie enough to think about further deterioration. In such circumstances, forecasting a profit well below that of last year is no bombshell. The profitability is bound to be skewed to the downside with deepening European debt crisis offsetting the lift from the lower oil prices. Even with the softening of oil prices, IATA is expecting the fuel cost to be the same percentage of the total operating overheads as that in CY08. With Europe categorically suffering the most, the US and Latin America have the potential to generate highest profits followed by the Asia-Pacific region. At the same time the risk of oil price and supply disruption in the Middle East cannot be forgone. The globe is again in a perilous situation as the latest spell of tensions is a clear signal of continuing volatility and uncertainty in the months ahead. How the situation pans out for global aviation is worth waiting and watching.