Business | Aviation

Positives emerge for global airline industry

Weak global economic conditions overhang industry prospects

  • By Tony Tyler Special to Gulf News
  • Published: 12:39 December 25, 2012
  • Gulf News

The world’s airlines are expected to earn $6.7 billion this year on revenues of some $637 billion, for a net profit margin of 1 per cent. To put that into perspective, it means airlines will earn around $2.25 for every one of the 2.97 billion passengers they will carry safely and securely this year.

This figure would look even smaller were we to exclude the profit contribution made by air cargo. Either way, it is not much money for an industry that has shaped our world and which supports 56.6 million jobs and $2.2 trillion in economic activity globally.

We expect the industry to do a bit better next year earning $8.4 billion — for a net margin of 1.3 per cent — while transporting 3.1 billion passengers. This is encouraging, but a 1.3 per cent margin will not bring airlines anywhere near to the 7-8 per cent margin needed to cover the industry’s cost of capital.

Actually, the mere fact that the industry is earning money during a period of slowing passenger growth, stagnant cargo volumes, and jet fuel averaging $130 per barrel, is a testament to the improving efficiency of airlines and the benefits of industry consolidation and restructuring.

But the downside is that macro-economic, geopolitical and policy risks remain high and largely negative. The Euro-zone crisis is far from solved, the threat of the US going over the ‘fiscal cliff’ has not been eliminated, and some aspects of the Chinese economy remain unstable. Politically, tensions between China and Japan, and between Iran and the West, persist.

Furthermore, aviation faces some big challenges going forward including:

* Poorly thought out taxes and regulation

* Infrastructure costs and capacity

* Addressing aviation’s environmental responsibilities

* Continuing to drive safety improvements

Let’s look at taxes and regulations. The bête noire of the industry on taxes is the UK’s Air Passenger Duty (APD).

Collecting around £2.9 billion annually, it is scheduled to increase to £3.3 billion by 2015-16. Without a doubt, it is the biggest tax on aviation in the world and the net result is that UK air travel is not growing as fast as air travel elsewhere in Europe.

We will continue to try to convince the UK government to reduce the crippling APD burden and will be vigilant in providing strong arguments against other governments wishing to increase the tax burden.

Unhelpful regulations are also a problem. Prime examples include the EU’s passenger rights regulation and the tarmac delay rule in the US. Airlines, passengers and regulators all want travellers to get to their destination without delays.

But the US and EU have chosen to place the entire responsibility for any delay or disruption on the airlines, regardless of the root cause. But making an airline compensate passengers financially for events over which they have no control, such as severe weather, volcanoes, or other events does nothing to get passengers to their destination on time.

Inadequate airport and airways infrastructure is also a challenge, particularly with air traffic expected to double by 2030 compared to 2011. The need for Europe to push forward with the Single European Sky is the most evident. The fragmentation of the skies adds some 5 billion euros to industry costs.

But the need for improvement is also evident in the Gulf. Air traffic control delays are the arch-enemy of a successful hub operation. To ensure maximum value from the impressive airport investments across the region, sorting out air traffic management is a top priority.

Turning to the environment, the European Commission’s decision to “stop the clock” on implementation of the EU Emissions Trading Scheme to international aviation is welcome news. This has enabled negotiations on market-based measures (MBMs) to move into high gear at the International Civil Aviation Organisation in preparation for agreement at their 2013 Assembly and the progress at ICAO is putting some pressure on the airlines.

How to fairly divide up the responsibility for MBMs among airlines to achieve carbon-neutral growth from 2020 will be a challenge.

We will also be working to drive further safety improvements. Aviation is already the safest way to travel, and through the first 11 months of 2012, the industry was well on its way to a third consecutive record year for safety.

But not all regions are performing equally and in particular, we are committed to working with other stakeholders to improving safety in Africa. Supported by a growing regional and global consensus, I believe that 2013 will present a historical opportunity to fix the continent’s safety deficiencies.

The Middle East as an example of what governments can achieve if they understand aviation’s role as a catalyst for economic growth. A study by Oxford Economics shows that the Middle East represents 3 per cent of global passengers, has 5 per cent of the total jobs and 6 per cent of the GDP generated by air transport.

In terms of actual numbers, Oxford’s study reveals that within the region, air transport supports 2.7 million jobs, and $129 billion in GDP.

As aviation, and the global economy, moves into what promises to be another tough year, the example the Middle East becomes more important by the day.

— The writer is the CEO and director-general of International Air Transport Association (IATA).

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