European airlines on track for $1.1B in losses

European airlines' losses this year are on track to hit $1.1 billion and the undustry's trade group said Monday airlines will scrape by everywhere else.
Passengers look at a flight departure information board at the main terminal of Frankfurt's airport. The industry is set for huge losses this year. (Alex Domanski/Reuters)

The global aviation trade group nearly doubled its forecast of European airlines' losses this year to $1.1 billion and said Monday the worldwide industry will scrape by with wafer thin profit margins due to high fuel prices.

U.S. and Asian carriers should make money this year, but more airlines in Europe might follow Hungary's Malev into bankruptcy if the European financial crisis worsens, the International Air Transport Association said.

The group called for governments to resolve a dispute over European carbon charges on airlines and to avoid tax and regulatory changes it said might hamper industry growth.

Mounting losses

Global aviation should make a total profit this year of $3 billion on revenue of $631 billion — a 0.5 per cent margin, IATA said. The group represents 240 airlines that carry 84 percent of passengers and cargo worldwide but its forecast covers the whole industry.

"The industry's profitability is balancing on a knife edge," said the IATA's executive director, Tony Tyler.

The "most immediate risk" is Europe's debt crisis, which could drag down profit if it triggers a recession, Tyler said. He said a 1 percent drop in global airline revenue could turn the small forecast profit into a $3 billion loss.

Asian carriers should lead global profits at $2 billion this year, while U.S. carriers will make $1.4 billion, IATA said. Latin American and the Middle East are expected to show profits of $400 million each while African carriers lose a total of $100 million.

The forecast European loss is nearly double IATA's March outlook. IATA economist Brian Pearce said that was due to Europe's financial turmoil. In addition to Malev's failure in February, smaller carriers in Germany and Spain have shut down.

"We've already seen some European airlines going out of business this year, and there is clearly a possibility that will continue," said Pearce.

Airlines are likely to respond to tougher conditions by retiring older aircraft to improve fuel efficiency and pursuing cross-border partnerships, though most countries still prohibit outright mergers, Pearce said.

The latest outlook is based on a forecast that oil prices will average $110 a barrel this year. IATA says fuel accounts for 33 per cent of carriers' costs, up from 13-14 percent a decade ago.

The global profit forecast represents a decline of more than 50 per cent from last year's $7.9 billion. That was down by a similar margin from 2010's $15.8 billion profit.

Also Monday, IATA appealed to governments to head off a mounting conflict over European carbon charges on airlines by negotiating a global system to regulate the industry's emissions of climate-changing gases.

China, the United States, India, Russia and others oppose the European charges, which took effect Jan. 1 and require carriers to buy permits to emit carbon. China and India have prohibited their airlines from cooperating and Beijing has blocked purchases of European aircraft by its carriers, stirring fears of further economic retaliation.

"We strongly oppose this unilateral action," said Wang Changshun, chairman of Air China Ltd., one of China's three main state-owned carriers, at a news conference with Tyler.

Aviation accounts for 3 per cent of total carbon emissions but is the fastest-growing source.

Talks on a global system have begun in the International Civil Aviation Organization and the European Union has said it would be willing to reconsider its system if an agreement is reached.

"It should be a global system," said IATA chairman Peter Hartman, president of Dutch carrier KLM NV, at the news conference.

"We are not opposing (regulation of carbon emissions), but we are opposing that they try to force other continents under their legislation," Hartman said.

The group appealed to governments to repeal taxes such as a new British passenger charge that it said hamper industry growth. It called for action on other issues such as delays in expanding airport capacity in Sydney and India's business capital, Mumbai.

"Aviation should be seen by governments as a source of economic growth, but not as a cash cow," Tyler said. "Using it wisely will deliver benefits throughout the economy."