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Fuel prices may cripple airlines' recovery

Productivity gains and cutting costs keep can't up with rising oil prices, industy leaders warn.

By ASSOCIATED PRESS
Published June 6, 2006

PARIS - Soaring fuel prices could delay a return to profit for the world's airline industry, its main global body warned Monday, as cost-cutting efforts fail to keep pace.

The International Air Transport Association, hosting airline executives at its annual meeting, raised its 2006 net loss forecast to $3-billion from $2.2-billion.

Unless the price of oil stops rising, IATA chief Giovanni Bisignani said the sector is unlikely to meet its goal of a break-even performance in 2007 after losing money each year since the Sept. 11 attacks.

The slowdown in the industry's recovery - after net losses had fallen steadily to $3.2-billion in 2005 from $13-billion in 2001 - comes despite sustained efforts to control costs.

Over the same period, airlines raised their average labor productivity by one-third and slashed sales and distribution costs by 10 percent, IATA figures show, helped by the widespread acceptance of Internet booking services and paperless tickets.

"Oil is the wild card," Bisignani said. "Prices are racing ahead of efficiency gains and robbing our profitability."

The price of oil rose back above $73 a barrel Monday after Iran's supreme leader threatened to disrupt global supply if the West punishes Tehran over its nuclear program. Recent kidnappings in Nigeria have helped to keep oil prices high.

The global airline industry posted an operating profit - which excludes hefty restructuring charges that result from layoffs - of $4.3-billion in 2005 and that is expected to rise to $7-billion this year.

David Bonderman, chairman of low-cost airline Ryanair and a founding partner of hedge fund Texas Pacific Group, said the industry is reaching the peak of its cycle, whose movements have been "disguised by oil prices."

He cited last year's record sales of 2,140 passenger jets by Airbus and Boeing Co., which have both said they expect well below half that combined tally in 2006.

"Today is as good as it gets for the airline industry. It's going to get worse," Bonderman said. "In two years' time, everyone will be canceling those airplanes."

Many long-haul carriers have supplemented their ticket prices with fuel surcharges. But these do not pass on the full extra cost to passengers, and airline executives said Monday they had reached the limits of the charges they could levy without hurting demand.

"The only saving grace is that this is a level playing field for all of us - and that the fittest will survive," said Singapore Airlines Ltd. CEO Chew Choon Seng.

[Last modified June 6, 2006, 05:44:53]