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Airline industry could rise again

Jun 17 2012 10:20
Ingé Lamprecht

Johannesburg – The wind may have turned around, but economic weather conditions for airlines remain unfavourable.

The industry has recently suffered subdued demand from travellers, as well as high fuel and other input costs.

The recent drop in the oil price to under $100 a barrel – after having been above $120 for some time – is welcomed, but players reckon other economic factors could offset the decline.

Tony Tyler, chief executive of the International Air Traffic Association, said at the association’s annual general meeting last week that the lower oil price, stronger than expected passenger traffic and the fact that cargo traffic had reached a turnaround point, were all positive for the industry’s profit outlook.

But he warned that the European debt crisis stands squarely in the path of economic growth, keeping the profit outlook for the year at $3bn, amounting to a net profit of only 0.5%.

The picture in southern Africa also looks rather gloomy, although the industry “is optimistic about a recovery”.

Chris Zweigenthal, chief executive of the Airlines Association of Southern Africa, said that while the rand was trading between R7.50 and R8.00 to the dollar the industry, which pays for its fuel in rands, enjoyed a slight advantage because of the lower oil price, but the rand has since weakened.

At around R8.30 the benefit of a lower oil prices becomes diluted and airlines effectively pay more or less the same for fuel as they paid when the oil price was higher.

Zweigenthal said the oil price is expected to rise closer to $110 a barrel again.

Frank van der Post, managing director for brand and customer experience at British Airways, which is operated locally by Comair, said the oil price plays a significant role in the group’s costs and it would definitely help for the oil price to remain under $100 a barrel.

As a result of weaker economic growth, which drives down the oil price, the lowering of turnover could considerably exceed any savings in fuel costs, he believes.

That’s a situation in which it would be rather difficult to rejoice about a lower oil price, he said.

James Rigney, chief financial officer at Etihad Airways, said the group last year spent more than $1bn on fuel – almost 40% of its costs, against a mere 14% 10 years ago.

“Every small change in the oil price is thus meaningful for us and a decline brings welcome relief,” he said.

But he agreed that the European debt crisis and the resultant weaker passenger traffic and smaller demand for freight traffic largely wipes out the benefit the industry enjoys from a lower oil price.

But hope is not lost.

Zweigenthal is optimistic about growth prospects, although the recovery will take longer than the industry would wish.

He reckons airlines will not soon experience the growth they saw in the mid-2000s, and subdued growth in passenger levels is in store for the industry.

Consumers are taking care and keeping their eyes open for the best offers, which puts prices under pressure.

One might hope to see an improvement next year, he said.

Low-cost airline Velvet Sky had to suspend operations a while ago, and Zweigenthal said he hopes there will be no further casualties.

He does not necessarily expect any mergers in the industry, but believes airlines will look for ways to help them recapitalise in future.

Difficult trading conditions will remain the order of the day and shareholders may have to offer assistance.

 - Sake24

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iata  |  oil  |  airlines



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