air cargo

International demand for airfreight space is likely to be lower than expected this year due to rising fuel costs, the industry has warned.

Cargo demand for 2011 is expected to increase 5.5 per cent, and not 6.1 per cent as predicted earlier in the year, the International Air Transport Association (IATA) announced yesterday (June 6).

The IATA blamed higher fuel costs for the revised forecast. The average oil price for 2011 is now expected to be US$110 per barrel (Brent), a 15 per cent increase over the previous forecast of US$96 per barrel, it said.

Fuel is now estimated to comprise 30 per cent of airline costs—more than double the 13 per cent of 2001, the IATA added.

The spiraling cost of fuel, together with the fallout from political unrest and natural disasters around the world, will also cut projected industry profits for 2011, the IATA revealed.

The association has further downgraded its 2011 airline industry profit forecast to US$4bn – a 54 per cent fall compared with the US$8.6bn profit forecast in March, and a 78 per cent drop compared with the US$18bn net profit recorded in 2010. 

“Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations to US$4bn this year,” Giovanni Bisignani, IATA’s director general and CEO said in a press release.

“That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance. The efficiency gains of the last decade and the strengthening global economic environment are balancing the high price of fuel. But with a dismal 0.7 per cent margin, there is little buffer left against further shocks.” 

Asia-Pacific carriers are expected to earn US$2.1bn – the most profitable of all regions. Even so, this is dramatically down from the US$10bn profit that the region achieved in 2010. 

Airlines in this region are more exposed than others to cargo markets and fuel price fluctuations, the IATA said. Asia-Pacific airlines carry 40 per cent of all air freight volumes, while low labour costs and relatively low hedging means fuel accounts for a bigger proportion of total costs. 

In addition, the Japanese earthquake and tsunami are expected to dent the region’s prospects for the remainder of the year. 

However, this will be more than offset by robust growth in both China and India. The continued dynamism of these economies means that Asia-Pacific is the only region where demand increases (6.4 per cent) are expected to outpace capacity growth (5.9 per cent), the association said.

Meanwhile, North American carriers will see the US$4.1bn profit of 2010 fall to US$1.2bn. 

The region’s carriers are being hit on the cost side by rising fuel prices, exacerbated by an older, less fuel-efficient aircraft fleet, according to the IATA. 

The region is also taking a hit on the demand side with 12 per cent of international revenues linked to the Japan market. 

This is being offset somewhat by a stronger than expected US economy and stronger inbound demand and exports fuelled by the weak US dollar. Careful capacity management is expected to see an overall demand increase of 4 per cent balanced by an equal increase in capacity.

European carriers will deliver a US$500m profit, down from US$1.9bn in 2010, due to the sovereign debt crisis. And Middle East carriers will deliver a US$100m profit, down from US$900m in 2010. Political unrest in parts of the region is hurting demand. 

Latin American carriers will be the only region to deliver a third consecutive year of profits, the IATA said. The regional economies continue to show good growth, and trade links with the US and Asia in particular are boosting traffic. 

African carriers are forecast to be the only region to post a loss, US$100m, in 2011. Political unrest across Northern Africa is dampening demand, particularly in Egypt and Tunisia, which have proportionately large tourism industries, the IATA said. 

Economies and air transport demand in many African countries have grown strongly but the local industry has struggled to turn this into profitable growth, hampered by poor infrastructure and restrictive government regulation. 

In a separate development, Tony Tyler, former chief executive of Cathay Pacific, will succeed Giovanni Bisignani as IATA’s director general and CEO from 1 July 2011. Mr Bisignani will become director general emeritus.