Strong Turbulence in the Airlines Over Oil and the Boeing Case

The rising cost of crude oil and the uncertainty about the return of the Boeing 737 MAX, in addition to the commercial war between the US and China, will plunge the sector’s profitability in 2019.

The global airline sector faces a year full of challenges due to the rise in the price of oil, the commercial war and the crisis of the Boeing 737 MAX. The big meeting of the industry, the general assembly of the International Association of Air Transport (IATA), has left no doubt: the demand for passengers continues to pull but costs escalate more, which anticipates a decline in profitability in 2019.

If the forecasts are met, the industry will close the year with a net profit of US $ 28,000 million, 6.6% less than in 2018 and the lowest level since 2014. This is the updated IATA forecast, which was just six months ago. months saw 21% higher profits.

Emirates. For Tim Clark, CEO of Emirates, “the issue will be resolved around Christmas, there are still a few months left and not because the problem is not solved, but because the regulators are adopting different points of view.” For Clark, “the FAA has issues to explain and, if it does well, it will convince others, but at the moment it does not seem that way.”
The rising price of oil at the start of 2019 is one of the factors that has forced IATA to correct its forecast. “Last December, we used US $ 65 per barrel as reference, now it’s US $ 70,” according to Brian Pearce, the association’s economic officer, which represents 290 airlines that account for 82% of total air traffic.

This year, fuel will account for 25% of the companies’ operating costs and its impact will be difficult to compensate for a growing passenger demand, but it slows down compared to previous years and that each time pays less for the tickets.

If passenger traffic slows down, the freight traffic is in free fall. The decline of this business, which usually functions as a thermometer for the industry and anticipates changes in the economic cycle, is directly related to the wave of commercial tension that has the main protagonists in the United States and China.

Singapore Airlines “You do not buy a plane to operate in a single destination, in addition to the Singapore guarantee, we need a minimum of countries that approve the 737 MAX because our operations are international, not domestic,” says Goh Choon Phong, CEO of Singapore Airlines, It has six aircraft of this model stopped and another 31 pending to receive.
“The air cargo business fell by 4.7% in April and the stagnation in world trade is a direct consequence of the wave of global protectionism,” says Alexandre de Juniac, IATA’s general director.

Thus, the imposition of tariffs in the first half of 2018 resulted in a volume cut that damaged the air cargo segment. But the commercial war, which has also compromised the margins of the premium demand for passengers -particularly vulnerable to the vicissitudes of the global economy-, has found on the other side a more diversified airlines. “The air freight business, which has always been between companies, is now more focused on the end customer and that is because of Amazon’s strength.

More difficult to gauge is still the impact of the Boeing 737 MAX crisis. The ban on flying the plane last March, after the second fatal accident in less than five months, left a trail of victims in the air sector. “The 737 MAX is between 2% and 3% of the total fleet in the industry, clearly a cost, but very complicated to estimate and I do not think it will reduce the forecast of results,” Pearce points out.

Some companies, however, have begun to give clues to the cost of cancellations and the plan they have designed to maintain their programming this summer season. American Airlines, for example, calculates an impact of 313 million euros in the year. TUIfly figures in 200 million the cost of having the aircraft stopped until the middle of July – the bill will reach 300 million if it arrives at the end of September – while Norwegian Air Shuttle aims at between 31 and 52 million in the second and third trimester.

Until the end of April, the balance for the Brazilian Gol was nine million and, in the case of Aeroméxico, not being able to use its seven 737 MAX was the same figure in the first quarter.

IAG. In the presentation of the quarterly results, the CEO of IAG, Willie Walsh, explained that “the strong capacity environment in the first quarter, which meant sacrificing margins, will be moderated in the coming quarters, in part by companies that do not they are able to operate the Boeing 737 MAX.” IAG plans to match the operating profit of 2018.

Within five to seven weeks, IATA will organize a new meeting with airlines, aircraft manufacturers and regulators, similar to the one held in May, to monitor the progress of the 737 MAX certification process after updating the system software that caused the accidents.

“What happened has put our reputation in the spotlight and the consequences of these tragedies go beyond the technical field, confidence in the certification process has been damaged and we ask regulators for collaboration, transparency and alignment. nobody is interested,” urges De Juniac.


Source: LarePublica