Oil shock enslaves airline industry

Last year it was the European debt crisis, and this year the oil debacle has taken the lead. Things do not seem to be improving for the global airline industry as its fate is almost entirely dependent on external factors. Earlier this year the sovereign debt crisis masked the profitability outlook of the sector with the fear of a complete meltdown of the Euro zone. Later the tension between Iran and the US over sanctions and Strait of Hormuz increased the risk of significantly higher oil prices, the repercussions of which could force the industry into losses. According to the latest forecasts by IATA, the new fuel price average for CY12 is estimated at 132.7 dollars per barrel and the impact of such price on the global airline industrys fuel bill for CY12 is likely to escalate by 37 billion dollars to 213 billion dollars. Amid fears and high likelihood of price climb, IATA has cut its profits forecast for the airline industry CY12 by more than 14 percent from the already low forecasts made earlier. If fuel prices go up and stay up, the industry is expecting a dual hit: firstly to the revenue side as the economy would go down and secondly on costs in which case the airlines will have to pay higher to the fuel companies. Moreover, 0.5 percent margin as a return on revenue is peanuts, leaving very little margin of error for airlines. A small shock as said by IATAs Tyler will push the industry into losses across the globe. However, a downgrade of 500 million dollars in profits due to the rise in expected average oil prices from 99 dollars to 115 dollars per barrel have been reined in by some positive development in the European fiasco, some recovery in US jobs and manufacturing data and bottoming out of the cargo and freight sector. To spice up the situation, the EU Emission Trading System has sparked off strong reactions from some very prominent players in the aviation game like China, India and Russia. With the danger of European ETS hovering over the global airline industry, a trade skirmish is the last thing the industry wants to see at this time.