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IATA downgrades Industry Profit Expectations for 2008

Travel News Asia Latest Travel News Wednesday, 2 April 2008

IATA has downgraded its industry profit expectations for 2008 to US$4.5 billion based on the global economic growth slowing to 2.6% and an average annualised oil price of US$86 per barrel (Brent Crude). This is the second downgrading of the 2008 forecast. In September 2007 IATA predicted a US$7.8 billion profit for this year. The initial impact of the credit crunch saw that lowered to US$5 billion in December 2007.

We still expect a positive bottom line of US$4.5 billion, but its turning out to be a very tough year, said Giovanni Bisignani, IATAs Director General and CEO.

Skyrocketing oil prices during 2004-2008 were offset by efficiency gains and rising consumer confidence. The broadening impact of the US credit crunch has brought buoyant consumer confidence to an abrupt end. Oil prices continue to rise. Demand is softening and after the 64% improvement in labour productivity and an 18% reduction in non-fuel unit cost attained since 2001, efficiency gains are much more difficult to achieve, said Bisignani.

At an average annual price of US$86 per barrel for Brent, fuel represents 32% of operating costs and a total bill of US$156 billion.

Along with the credit crunch and oil prices, three other key elements are impacting the performance of the industry:

Aircraft Delivery Cycle: The downturn in demand coincides with a stepping-up of aircraft deliveries - from 1,041 new aircraft in 2007 to an expected 1,231 in 2008. While some of this will be offset by retiring less fuel-efficient aircraft, real yields (adjusted for inflation and the US dollar) are expected to drop 4.1% this year (compared to a 3.2% drop in 2007).

Increased competition: The US-EU Agreement on Open Skies is increasing trans-Atlantic frequencies by 11% in April. London Heathrow and Spain are leading the change with an increase of 25% each. Increased competition will put pressure on yields in these markets.

Non-Core Assets: In the past two years non-core business significantly boosted the consolidated profits of airlines. In 2007 alone the contribution of non-core profits and asset sales almost tripled the airline business profit of US$5.6 billion to over US$15 billion. The crisis in financial markets will make asset sales more difficult in 2008.

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