Mon, Nov 07, 2011 page11

• Airlines are facing new turbulence

  • AFP, SINGAPORE
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  Hefty falls in earnings for aviation giants Singapore Airlines Ltd and Emirates are the clearest signs yet of fresh turbulence just three years after the 2008 financial crisis wreaked havoc, analysts said.

  The two companies, regarded as among the industry’s most well-managed carriers, cited escalating fuel expenses and growing unease about the global economy as the main drag on profits.

  Both airlines rely heavily on intercontinental passenger and cargo traffic to drive earnings and the decline in profits announced on Thursday reflects the severity of the situation facing the sector, analysts said.

  

  The tail wings of, left to right, British Airways, Singapore Airlines and Qantas Aiways planes are pictured at Singapore Changi Airport on Oct. 29.

  Photo: Reuters

  “The global airline sector is definitely under pressure right now from both fuel prices and economic volatility,” said Jonathan Galaviz, managing director of Galaviz and Co business consultancy.

  “There is no question that the global economic volatility over the last quarter has created heartburn for the global airline industry,” he said.

  Singapore Airlines announced on Thursday that net profit in the six months ended September dived 62 percent year-on-year to S$239 million (US$188 million), and cautioned earnings remained under pressure from high fuel prices and anemic global growth.

  “The prevailing economic uncertainty and weak consumer confidence are impacting demand for air transportation. Advance passenger bookings are showing signs of weakness, particularly in Europe and the United States,” Singapore Airlines said in a statement. “Forward prices for jet fuel remain high and volatile.”

  Singapore Airlines pointed out that yields for air freight, one of several indicators on the state of global commerce, were also expected to be under pressure.

  On the same day, Dubai’s Emirates, one of the world’s fastest-growing airlines, reported half-year net profit tanked 76 percent from last year to 827 million dirhams (US$225 million) with higher fuel costs a major culprit.

  The state-owned carrier said it had to fork out US$1 billion more for jet fuel compared with the corresponding period in the previous financial year.

  Shukor Yusof, an aviation analyst with Standard & Poor’s Equities Research in Singapore, said the outlook for the airline sector appeared cloudy, with the US economy stuck with weak growth and Europe struggling to manage the fallout from Greece’s debt woes.

  “We are looking at a severe erosion in not just premium [business and first class] seats, but at the back of the aircraft, which is the economy seats,” he said. “The situation is quite fluid with what is happening in Greece. If Greece disintegrates into something more serious than what we are seeing, then the possibilities are endless in terms of the erosion of airline profitability.”

  The International Air Transport Association, which represents about 230 carriers that account for more than 90 percent of scheduled global air traffic, said its members were being hit by a double whammy of high fuel prices and softer global economic conditions.

  Jet fuel prices were at US$128 a barrel late last month, 35 percent higher than last year, it pointed out.

  “The financial performance of the airline industry is closely linked to the health of world economies. If economic growth is strong airlines can cope with high fuel prices,” it said.

  While global air passenger traffic rose 5.6 percent in September from a year ago, that might partly reflect travel booked earlier in the year when there was more economic optimism, the association said.

  Air freight contracted 2.7 percent year-on-year in September, its fifth straight month of decline in line with weakening business and consumer confidence, it added.

  The last time global airlines ran into turbulence was in the aftermath of the global economic slump that started in late 2008. Global carriers lost US$4.6 billion in 2009, according to the association.

  While it is too soon to say whether the new problems will be as deep or long-lasting, the signs are that there is a bumpy ride ahead.
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