Airline Losses Mount as Revenues Dive Below Post-911 Levels

By Don Miller
Associate Editor
Money Morning

Global airline losses may total $4.7 billion this year as revenues plunge below levels seen after the terrorist attacks of September 11, 2001, the International Air Transport Association said today (Tuesday).

The revised loss estimate, nearly double the previous forecast issued in December, reflects "the rapid deterioration of the global economic conditions," Geneva-based IATA said in a statement.

The industry body had estimated in December the airlines would lose $2.5 billion in 2009. Airline capacity could shrink 6% as carriers shed jobs, eliminate routes and idle planes to survive shrinking passenger and cargo demand sparked by the global recession. 

IATA based its revised estimates on a 1.9% contraction in global GDP, which is suffering the deepest recession in 70 years. The December forecast was based on a projected 0.9% drop.

"The state of the airline industry today is grim," IATA Director General Giovanni Bisignani said in a press conference, Bloomberg News reported. "Demand has deteriorated much more rapidly with the economic slowdown than could have been anticipated even a few months ago. The industry is in intensive care."
The deepening recession has pushed almost 40 airlines worldwide out of business and toppled previously profitable operators such as British Airways Plc (LON:BAY) and Cathay Pacific Airways Ltd. (ADR:CPCAY), into the loss column.

Losses in the fourth quarter of 2008 exceeded $4 billion, compared with the previous estimate of  $1 billion - even as oil prices dropped by more than 50% from their $147 peak in July.  Some airlines suffered from being locked-in to fuel hedging positions which kept them from fully taking advantage of cheaper crude, IATA said.

"The relief of lower fuel prices is overshadowed by falling demand and plummeting revenues," Bisignani said.

And official numbers don't really paint a clear picture of how bad things really are. Some airlines used hedging instruments that were marked to market because they'd have produced a cash loss if exercised, which would have jumped industry losses from an estimated $8.5 billion in 2008 to as much as $17 billion.
To make matters worse, IATA's figures don't include non-cash items such as a $6.9 billion goodwill write-off from the merger of Delta Air Lines Inc.(DAL) and Northwest Airlines Corp. Counting those items, the industry's loss last year would have climbed to roughly $21 billion.

The numbers confirm the current downturn could be worse than the aftermath of the 2001 terrorist attacks, which put a major chill on air travel worldwide. Industry revenues fell about 7%, or $23 billion, from 2000 to 2002.

By comparison, revenues are expected to fall by $63 billion, or 12%, to $467 billion, the association said.  Passenger and cargo traffic are likely to drop by 5.7% and 13%, respectively in 2009. 

On top of the global slowdown, the industry carries whopping debt loads of $170 billion, which puts further pressure on the balance sheet.

"Airlines are facing an unprecedented global crisis due to a deepening global recession," the trade body said in its statement. "The sharp drop in passenger and cargo demand is reshaping the industry, with drastic change from capacity cuts, to consolidation talks and cost-reduction measures."

Carriers in North America are expected to survive the downturn better than others because they have been able to reduce capacity fast enough to keep up with the drop in demand. 

That should allow them to turn last year's losses into a profit of about $100 million, IATA said. All other regions will operate in the red, including losses of $1.7 billion in the Asia-Pacific region and $1 billion in Europe.

The Swiss-based body said its latest forecast assumes the economy and air transport demand would hit bottom by mid-2009 and then start to recover, Reuters reported.

"We do expect better prospects toward the end of this year or the beginning of 2010," Bisignani told a news conference at Geneva airport.

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