independent

Saturday 19 April 2014

Airline sector takes a nosedive as loss predictions double to $9bn

IT is not a great time for aviation. Shares in major airlines worldwide have been put under the hammer this year as investors take a wary view of a sector which is being hit on several fronts.

Just last week IATA, the industry's main trade group warned that airline losses worldwide may total $9bn this year, nearly double a previous forecast, as an outbreak of swine flu compounds the effects of the recession, said.

On top of this, it looks as though oil prices may be heading back up, at least in the short term, while demand for premium travel has fallen sharply.

Little wonder, then, that Aer Lingus occupies the top spot in the league of losers on Dublin's stock market. The shares have fallen a sharp 63pc since the start of the year, with little immediate sign of a turnaround.

IATA said that global airline sales may fall 15pc to $448bn this year from $528bn in 2008. "This is the most difficult situation that the industry has faced," IATA chief executive Giovanni Bisignani said last week. "Our future depends on a drastic reshaping by partners, governments and industry."

There's "nothing we can do in the current environment to stimulate traffic, particularly in the premium market," said British Airway's chief executive officer Willie Walsh added. "It doesn't respond to pricing activity."

Cargo

Passenger traffic may fall by 8pc and cargo demand will slump 17pc, IATA said. The group was forecasting an industry loss of about $4.7bn for 2009 as recently as March 24.

Yields, a measure of average revenue per passenger, will fall an estimated 7pc this year as fewer people purchase first- and business class tickets and airlines reduce fares in an effort to win market share, IATA said.

The recession has hammered premium class traffic as business travellers switch to cheaper seats, forcing British Airways Plc and Cathay Pacific Airways to losses. Aer Lingus has responded to the downturn by pulling in its horns, cutting some of its long-haul routes in a bid to weather the storm.

With such a bleak outlook, can things improve? Possibly. The airline is in the process of appointing a new chief executive and this could be the start of a turn in its fortunes.

Granted the airline has been burning through its cash pile, but the fact is that it still has a big bank balance -- €594m at the end of March -- enough to see it through this downturn and position it to take advantage when the market improves. For investors, the trick will be in guessing when that turn might happen.

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