Air Passengers Will Pay the Price of Rising Oil: IATA
Oil in Iraq. Yeah, it's complicated.
As US crude oil prices crossed $100 a barrel for the first time since September 2012 on Wednesday, the CEO of International Air Transport Association (IATA) warned that any further spike in oil prices could lead to higher passenger fares.
"Any pressure upwards is a great concern for the industry. A third of our costs are oil costs so clearly any movement upwards is going to have an impact," Tony Tyler of IATA told CNBC.
"These charges have to be passed on. For competitive reasons the airlines will be reluctant to be the first to do so. But as time goes on we will see upwards pressure on fares, if fuel prices remain high," he added.
Crude futures rose as high as $100.64 in early Asian trade, having tested the $100 mark in the New York session, driven by supply concerns stemming from geopolitical turmoil including political unrest in Egypt and protests in Libya that have shut down several oil fields in the country.
For Asian carriers, the rise in US dollar denominated oil prices coupled with depreciating Asian currencies will pose a greater challenge, Tyler noted.
"It's a double whamming if dollar denominated oil price goes up, and your own yields fall because of weaker currency. It makes life extremely difficult for them," he said.
Nevertheless, IATA predicts that profitability in Asia will be higher than in any other region this year. "The Asian carriers are a robust lot and they will ride it through," Tyler said.
China Slowdown
He added that the slowdown in China, the world's second largest economy, is, however, weighing on airlines' freight businesses.
"We're seeing it on the cargo side, on the passenger side to a lesser degree. China is not providing the pillar that's holding up the market that many predicted it would be," he said.
Tyler noted that cargo growth is flat due to weaker exports out of major markets such as China.
"There's weak business confidence generally around the world. And it's making life difficult for those airlines that have exposure to the cargo industry," he said.
Global Airline Profitability
IATA forecasts the airline industry will generate profits of $12.7 billion in 2013, significantly higher than the $7.6 billion made last year.
Global passenger traffic has been expanding at a healthy rate led by emerging markets. Overall demand rose 5.6 percent in May, compared to the same period a year earlier, IATA reported on Wednesday.
However, profit margins remain thin, Tyler said, at 1.8 percent. "I wouldn't want [people] to think suddenly everything is great in the airline industry. It's still a difficult business."
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