Oil is the great unknown for airlines | FT Alphaville

Oil is the great unknown for airlines

The International Air Transport Association, IATA, has issued its latest industry earnings forecast and the outlook has deteriorated.

The world’s airlines are now forecast to lose $9bn this year. The newest 2009 forecast is double the level IATA predicted in March, with the increase mostly down to a further collapse in yields, or average ticket prices.

While lower yields are practically a given at this point, a less certain component of the 2009 loss figure will be the oil price. IATA’s newest forecast sees the industry’s fuel bill at $106bn in 2009 versus a 2008 fuel bill of $165bn, when oil averaged circa $99 a barrel. While IATA doesn’t specifically say in its latest press release what oil per barrel price the 2009 fuel bill projection is based on — it would appear to something like an average of $50 a barrel this year.

Energy analysts meanwhile, are already predicting a significantly higher price. The average forecasts are below, via Bloomberg. But others, notably Goldman Sachs, expect it to go even higher. Goldman last Thursday upped its 2009 year-end forecast to $85 a barrel.

With the Nymex quarterly forecasts below, and using $47 a barrel as the Q1 price, airlines’ combined fuel bill for 2009 would be about $147bn.*

Oil price forecast on Bloomberg

Which kind of brings us back to the point we made Tuesday last week about airlines’ general profitability — the point being that they generally aren’t. The industry posted collective net losses of $41.6bn between 2001 and 2006. In fact, it has been unprofitable every year since 2001 — except for 2007 at the top of the industry ‘super-cycle’ — when it made $12.9bn.

Anyway, Bloxhams’ veteran airline analyst Joe Gill has some thoughts for aviation investors today:

In a short 10 weeks since its last profit forecast, IATA has moved to double its estimate to a loss of $9bn on sales of $448m. Never has so much revenue been generated by so many for so little. Moreover, the industry will spend about $25bn on the delivery of 800 jets this year, continuing its cash consuming ways. We wonder how long it takes equity investors to lose patience with an industry that habitually destroys shareholder value ?  Expect more calls for Government bail-outs and mergers. In the mean time some airlines will tap shareholders (note Air Berlin last week) for money to continue their forlorn ways while ignoring the importance of industry lowest costs. Don’t get sucked in to handing over money for “general corporate purposes”. 

* We’re basing this very rough math on the numbers in the IATA table ‘Fuel Impact on Operating Costs‘, which is slightly out of date. The 2009 fuel bill projection of $116bn at $50 a barrel, works out to roughly 2.32bn barrels of oil consumed but obviously this will be in jet fuel, so crack spreads will be a factor not taken into account in these numbers. Also, the IATA fuel estimates don’t seem to take into account any hedging by airlines — which could likely significantly lessen the impact of higher crude prices, but you get the idea.

Related links:
Airline cycles, redux – FT Alphaville
Airline industry to lose $9bn this year – FT Alphaville