Airlines poised to lose pounds 3.2bn; IN ASSOCIATION WITH Rensburg Sheppards Market watch Market Comment.

Byline: BY ALISTAIR HOUGHTON

AIRLINES are set to lose pounds 3.2bn this year as the recession has caused revenues to slump at an even faster rate than first feared.

The International Air Transport Association (IATA) had forecast in December that the industry would lose pounds 1.7bn in 2009, but yesterday it said cargo and passenger demand had slumped again.

IATA director-general Giovanni Bisignani said the industry was in "intensive care" and said the industry would hit rock bottom this year before starting its recovery next year.

He said the industry crisis would be even worse if fuel prices had not fallen.

IATA, which represents 230 airlines, including British Airways and Emirates, said industry revenues would fall 12% to EUR317bn in 2009.

That is even steeper than the revenue decline after September 11, 2001, when revenues fell 7%.

Passenger traffic is projected to fall by 5.7% this year, significantly higher than the 3% fall originally predicted.

IATA said business and firstclass traffic would fall even faster, hitting airlines' revenues still further.

Cargo demand is expected to fall by 13%, much worse than the forecast of 5%.

Mr Bisignani said: "The state of the airline industry today is grim.

Demand has deteriorated much more rapidly with the economic slowdown than could have been anticipated even a few months ago. Our loss forecast for 2009 is now USEUR4.7bn (pounds 3.2bn). Combined with an industry debt of USEUR170bn (pounds 115bn), the pressure on the industry balance sheet is extreme."

The IATA expects the fuel price this year to be pounds 34 per barrel, meaning the industry's fuel bill is expected to drop to 25% of operating costs.

In 2008, fuel bills made up 32% of airline companies' costs, with an average price of pounds 67 per barrel.

Mr Bisignani said: "Fuel is the only good news. But the relief of lower fuel prices is overshadowed by falling demand and plummeting revenues.

"The industry is in intensive care. Airlines face two immediate fundamental challenges: conserving cash and carefully matching capacity to demand."

Asia-Pacific carriers are set to be the worst-hit by the downturn, with expected losses of pounds 1.2bn and with demand for services to and from China set to fall by more than 5%.

European carriers are set to lose pounds 680m in 2009. North American carriers are set to post the best performance, with expected profits of pounds 68m as a 7.5% fall in demand is expected to be matched by a 7.5% cut in capacity.

Mr Bisignani said: "The prospects for airlines are dependant on economic recovery.

There is little to indicate an early end to the downturn. It will be a grim 2009. And, while prospects may improve towards the end of the year, expecting a significant recovery in 2010 would require more optimism than realism.

Recovery will not come without change.

"There is no doubt that this is a resilient industry capable of catalysing economic growth. But we are structurally sick."

Mr Bisignani said the airline industry did not need state bailouts, but instead needed a resumption of bank lending and for regulators to allow more industry consolidation.

He said: "The historical margin of this hyper-fragmented industry is 0.3%. Bail-outs are not the prescription to return to health.

"Access to global capital, the ability to merge and consolidate and the freedom to access markets are needed to run this industry as normal profitable business."

Industry is in intensive care

CAPTION(S):

Giovanni Bisignani, of the IATA - warning of massive industry losses