The black shadow hanging over the industry

Eminent business travel reporter Stanley Slaughter discusses the price of oil...

There was some good news last week for the travel business. Carlson Wagonlit Travel reported that its sales volume in 2010 rose to $24.3bn, a 13.5% increase compared with 2009 while transactions rose by 11.9%. The week ended with the International Air Transport Association (IATAThe International Air Transport Association: IATA represents and serves the airline industry, with a membership made up of around 230 airlines. The association seeks to raise awareness of how aviation benefits the economy, fight for airline's interests and ensure industry regulations are sensible. IATA helps its members directly by offering advice on reducing costs while improving efficiency and on improving safety standards. It also provides professional support in the form of publications, training and consulting. ) reporting a 5.1% rise in the number of passengers in January compared with January 2010 and an 8.1% increase in the number of passengers travelling premium class.

The figures of CWT and IATA are both good indications that the travel business is continuing to grow, with agents handling more transactions and more people flying. The rise in premium travel is an especially good sign as IATA statistics tend to show over the years that as business confidence rises, so does the number of people flying towards the front of the plane.

But while welcoming these signs of continuing revival, it is difficult to get away from the feeling that there is a black shadow hanging over the travel industry in general and the aviation industry in particular. This is the price of fuel.

At the start of 2011, the aviation industry seemed to be entering a positive phase on the back of an estimated profit of $16bn in 2010. This glow did not last long with IATA downgrading on its profit forecast for this year from an original figure of $9.1bm to its current estimate, issued in March, of $8.6bn. This would be a significant fall in profit of 46% compared with 2010.

IATA blamed the “recent surge in oil prices” for its re-think, with crude oil rising on average from $84 to $96 a barrel. Some airlines had already reacted to the rises, among them British Airways which in February had increased its fuel surcharge by at least £12 a sector, leaving passengers with a surcharge ranging from £75 to £125 a flight, depending on class and distance. It was the second time in three months that the British national carrier, which is no worse or no better than other major airlines, had increased it fuel surcharge.

This was just a few weeks ago and the situation has worsened since then. Last Friday, IATA recorded on its website (www.iata.org ) that the price of jet fuel for the week had averaged $132.3 per barrel. This was a rise of 11.4% on the same week last month and of a staggering 47.6% compared with the same week in 2010. The price of crude oil has also risen to $102 per barrel. These increases, IATA estimates, are likely to add $48bn to airline fuel bills.

This week it was averaging $134.4 per barrel,  a 1.6% rise on last week,  a 12.3% rise on a month ago and an equally staggering 49.4% increase on a year ago.

Partly it is growing demand, especially from countries like China and India, but mostly this rise is due to the crises in the Middle East. Serious unrest in Bahrain, Yemen and, most of all, Libya plus the uncertainty across the whole region has gravely unsettled the market.  The fighting in Libya is estimated to have forced the country to halve its oil production, analysts say, while the Bahrain Petroleum Company has partially shut down production because of a shortage of staff who are out demonstrating against the government.

Both of these may be seen as short term – but how long that will be is currently impossible to say. It could alter on a day to day basis.

This leaves airlines, totally dependent on regular and affordable supplies of oil, in an impossible situation. There are only so many hikes in fuel surcharges the still fragile market can take but the alternative is to bear the costs themselves and possibly plunge themselves back into annual losses.

No doubt the present situation will give added impetus to the development of biofuels for aircraft but that is at best only a partial solution and a long term one at that. 

The best hope for airlines is that the economies of enough countries in the world stay strong so their business travellers can go on flying, hopefully in premium class, thus keeping up the yields for airlines.  This might keep the show on the road for a while as long as there are no sharp increases in capacity which could force fares down.

This situation was slightly helped in the UK by the decision yesterday (March 23) of Chancellor George Osborne in his Budget to postpone for a year any increase in the controversial and widely disliked Air Passenger Duty (APDAir Passenger Duty (UK only): An excise duty charged on the carriage of passengers flying on an aircraft with an authorised take off weight of more than ten tonnes or more than twenty seats. Due when the aircraft first takes off on the passenger’s flight and is payable by the aircraft operator).

But bumping along is not a long term solution. For that the airlines need an end to the Middle East troubles and a world economy that is steadily growing. Neither seems likely at the moment nor for the foreseeable future. These scenarios also indicate how strongly airlines are at the mercy of the fluctuations of the world economy.

In fact the most likely prediction is that oil prices will keep on rising and that could present airlines with the situation they want least of all: growing costs and a shrinking market.  The old saw that there is never a good time to be in the aviation industry was never more true than it is now.