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High oil prices ‘benefiting Mideast airlines’

The airline industry remains on track to deliver a second consecutive year of improved profitability, says the International Air Transport Association (IATA).
This is despite a slight downward revision to its industry outlook for 2014 to an industry profit of $18.7 billion from the previously forecast $19.7 billion, according to an IATA statement.
It says that Middle Eastern airlines are expected to post a $2.2 billion profit.
This is an improvement on the $1.6 billion profit that the region’s airlines made in 2013, but it is a $200 million downgrading from the previous forecast.
Oil revenues from high oil prices are benefiting the home markets and the region’s carriers continue to win market share in long-haul connections through the region’s hubs. Cargo, in particular is experiencing strong growth as a result, partly, of tapping into newly emerging trade lanes such as those between Africa and Asia. This follows significant investments by Chinese companies in Africa, IATA said.
Globally, IATA said that airlines expect to make $1 billion less profit this year than previously hoped, denting a US-led recovery, as the Ukraine crisis pushes up the industry’s fuel bills
IATA said that the main driver of the downward revision is higher oil prices which are now expected to average $108.0/barrel (Brent) which is $3.5/barrel above previous projections.
The $3 billion added cost on the industry’s fuel bill is expected to be largely offset by stronger demand, especially for cargo, which is being supported by a strengthening global economy. Overall industry revenues are expected to rise to $745 billion ($2 billion greater than previously projected).
“In general, the outlook is positive. The cyclical economic upturn is supporting a strong demand environment. And that is compensating for the challenges of higher fuel costs related to geo-political instability. Overall industry returns, however, remain at an unsatisfactory level with a net profit margin of just 2.5 percent,” said Tony Tyler, IATA’s director general and CEO.
The aviation industry retains on average $5.65/passenger in net profit. This is improved from $2.05 in 2012 and $4.13 in 2013. But it is below the $6.45 achieved in 2010.
“The efficiencies of improved industry structure through consolidation and joint ventures is providing more value to passengers and helping airlines to remain profitable even in difficult trading conditions. But we still need governments to understand the link between aviation-friendly policies and broader economic benefits. In many parts of the world the industry’s innate power to drive prosperity through connectivity is compromised by high taxes, insufficient infrastructure and onerous regulation,” said Tyler.
IATA outlook forecasts are estimates of the aggregate performance of the global air transport sector and should not be taken as an indicator of individual airline performance which can vary greatly in magnitude and direction from the global outlook.
Major forecast crivers
Fuel Prices: Fuel currently accounts for some 30 percent of the average airline cost structure. Recent tensions, including in the Ukraine, have sparked an upward trend. Oil prices are now expected to average $108/barrel (Brent) which is $3.5 higher than previously forecast. Jet fuel prices are also expected to be higher at $124.6/barrel which is a $1.7/barrel increase from previously forecast (and unchanged from 2013). Overall, fuel costs are expected to rise by some $3 billion to $213 billion compared to the December forecast.
Demand: Air travel demand remains strong and now demand for air cargo is growing. 
Passenger demand has been strong throughout the recovery process. We expect passenger demand growth of 5.8 percent this year. That is slightly weaker than previously forecast (6.0 percent), but an improvement on the 5.3 percent growth for 2013. Passenger yields however are expected to deteriorate by 0.3 percent.
Cargo demand is showing the biggest improvement. Instead of the previously projected 2.1 percent growth, it now appears that air cargo is headed for 4.0 percent growth in 2014.
And the yield decline will be moderated from the previously forecast 2.1 percent fall to a decline of 1.5 percent.
Trading conditions remain challenging, but positive macro-economic trends are providing a much-needed boost.
There are however, several major changes which continue to challenge the cargo business.
Traditionally air cargo has grown only slightly less than world trade, at twice the rate of expansion of industrial production. The recent trend is for air cargo, world trade and industrial production to grow in tandem. The industry is growing more slowly than normal at this stage of the economic cycle.
According to the IATA, The “on-shoring” of production supply chains continues to impact the cargo business driven by:
• Protectionist measures which are dampening international trade and encouraging companies to “on-shore” supply chains, including many ‘buy local’ procurement policies. Some 500 protectionist measures have been documented by Global Trade Alert in 2012 alone.
• Relative changes in production costs. For example, US energy prices have dropped whereas Chinese wage rates continue to rise.

Ancillary revenues: Airlines continue to introduce new product options for passengers which are boosting ancillary revenues. The average fare per departing passenger is expected to be about $181. Ancillary services may add almost $14 on top of this. Industry consensus continues to build on the need for New Distribution Capability. Pilot projects continue to be launched in anticipation of the expected US Department of Transportation approval later this year. Modernizing distribution standards will enable airlines to develop further innovations which enhance consumer choice and add value to the travel experience.
Global economic trends: GDP growth projections for 2014 have been raised to 2.9 percent (from 2.7 percent). Improvements in the global economic outlook are largely being driven by developed economies. Job creation in the US, the end of fiscal austerity in Europe and a much weaker yen are stimulating demand. While China appears to be continuing on a trajectory of impressive growth, key emerging economies such as India and Brazil face major economic challenges.
Emerging market volatility is further increased by the recent flow of capital into US dollar assets causing problems for emerging markets with current account deficits.
Several emerging markets have taken steps to raise interest rates (despite soft economies) in order to stem larger currency exchange rate fluctuations. This is compounding their difficulties with economic growth.