Airlines face record $8.4b losses

TOKYO - Total global airline losses will widen 25 per cent this year to a record US$6 billion ($8.4 billion), worse than expected, as fuel and wage bills surge, the industry-funded International Air Transport Association says.

Fuel bills will rise 31 per cent to a total of US$83 billion, based on an average crude-oil price of US$47 a barrel, IATA Director-General Giovanni Bisignani said at a conference yesterday in Tokyo.

Combined losses will be 9 per cent more than the US$5.5 billion Geneva-based IATA forecast last month.

The US$400 billion global aviation industry lost more than US$36 billion between 2001 and 2004, led by US carriers including United Airlines, because of terrorism, Asia's Sars outbreak and record fuel prices.

United Airlines and its biggest rivals are trying to persuade unions to accept wage and benefit cuts to try to restore profits.

"There's a limit as to how airlines can increase their fuel surcharges," said Mark Tan, a strategist at UOB Asset Management in Singapore, which owns shares in Singapore Airlines and Thai Airways International. Airlines have not been able to fully cover their costs with surcharges, he said.

The price of jet fuel, which makes up between 15 per cent and 40 per cent of an airline's operating costs, surged as much as 70 per cent last year.

Jet-fuel prices have risen 41 per cent in the past 12 months to a record US$76.38 a barrel on April 4 in Singapore, and traded at US$62 a barrel on May 27, according to Platts pricing service. The world price of crude oil may remain at about US$50 a barrel this year.

The price per barrel of jet fuel has surged 88 per cent in the past three years and the industry's fuel bill has doubled, IATA said.

Airlines were profitable in Asia, Europe and the Middle East, with South American carriers "near break even" last year, said Bisignani.

North American carriers lost US$9 billion last year as labour costs were high and low-fare competition drove down fares, he said, and African airlines lost more than US$150 million.

Asian carriers recorded US$2.6 billion in combined profit last year, boosted by strong growth in China and lower labour costs, he said.

European carriers posted a US$1.4 billion profit as "consolidation helped capacity management". Middle Eastern airlines made US$100 million on higher travel demand.

Improvements in fuel efficiency could lead to savings of up to US$2 billion this year, with every 1 per cent improvement in efficiency in the industry cutting costs by US$800 million a year, IATA said.

Air France-KLM Group, Europe's largest airline, said its fuel cost is likely to rise by 1.3 billion ($2.28 billion) this year, says chief executive Jean-Cyril Spinetta.

Airlines must use fuel surcharges to protect their earnings, said Winson Fong, who owns airline stocks among the US$2.3 billion of Asian equities he helps manage for SG Asset Management in Singapore.

"The impact may not be as serious as expected earlier," Fong said. "We're expecting more passengers travelling for business and going to casinos.

"Demand is still there."

Austrian Airlines, the country's largest air carrier, wants to increase its hedging to 40 per cent, chief executive Vagn Soerensen said at the IATA conference in Tokyo, without giving details.

Taiwan's China Airlines said it would apply surcharges to protect its earnings from surging fuel costs.

The Taipei-based carrier has already hedged 58 per cent of its fuel costs this year and hedged 30 per cent of 2006 costs, said chairman Chiang Yao-Chung.

"We have applied to raise our surcharge on regional routes to US$7.30 from US$5 and to US$22.30 on long-haul flights from $15," he said, without saying when the surcharges would be added.

- BLOOMBERG