External Events Threaten to Upend the Airline Industry
Not long ago, the International Air Transport Association (IATA) announced that the airline industry was performing well and that there was huge potential with a forecast for global airline profitability to reach US$18 billion in 2014, compared to US$10.6 billion in 2013. Did it speak too soon? Geopolitical tensions, the Ebola virus outbreak in Africa, fuel price spikes due to the turbulent events in the Middle East, airplane crashes in war zones, airspace closures, terrorist threats and volcanic eruptions are all expected to challenge these predictions for a successful 2014. External factors will continue to drive uncertainty and test the financial muscle of global airline players, while putting at stake the survival of others.
The political tensions that erupted in the Middle East will continue to be a drag on the region’s economic prospects, but also globally. In addition, fluctuating fuel prices and regional turmoil are but a few of the ongoing threats to airlines’ growth and profit margins.
For the first six months of 2014 jet fuel prices recorded very low levels compared to previous years, which was leading to a snowballing effect, forcing many airlines to cut their hedges. This could bring more problems later in the year, however, if prices were to sharply rise and result in huge losses. According to IATA, the jet fuel price declined by 5.6% in August 2014 compared to the same period a year ago.
Jet Fuel Price as of 15 August 2014
Source: IATA, Euromonitor International
EU – Russia Crisis
The EU sanctions on Russia are leading to a retaliation response by the latter, which is considering a ban on EU and US airlines flying over its transit space. If such a move is made, it will predominantly affect route networks from Europe to Asia Pacific and airline offerings to such markets as Japan, South Korea and China, among others.
Huge fuel bills, longer journeys, which will also require the introduction of more stopovers, and an overall higher price tag for the end consumer from these carriers will be the major consequences of these events. This, in turn, will also hurt the competitiveness of the European airlines in a market (ie Asia Pacific) that is hugely in demand.
Among the hardest hit could be a carrier such as Finnair, which is extensively using Russian airspace to operate to destinations in Asia Pacific. Although Finnair’s financial results in 2013 were negative, it reported growth of market share in both European and Asian countries. According to Finnair’s financial report, the company’s share of passengers for European flights grew faster, whereas Finnair’s Asian sales suffered from intensified competition. This could intensify even more.
The outbreak of Ebola virus in West Africa has been another factor threatening the airline industry. Emirates Airlines, British Airways, Korean Air Lines and Kenya Airways, among others, are temporarily suspending operations to this part of the world, while governments are taking precautionary measures – issuing warnings and advising their citizens not to travel to the affected countries.
The epidemic will contribute to a general slowdown in tourism flows to the region, but also impact airline revenues and related sectors – such as duty free, catering, airports and, of course, hotels. On a national level, according to the Financial Derivatives Company Limited (FDC) in Lagos, the impact of the Ebola outbreak will cost Nigeria, one of the countries affected, over US$2 billion.
Airlines could become one of the major casualties of the Ebola outbreak, which could lead to declining passenger numbers and profitability as well as severe flight cancellations to West Africa. Previous experience in the case of SARS in Asia Pacific showed a loss of revenues for the regional carriers of over US$6 billion, according to IATA. This figure is expected to be even higher for already struggling African players.
As if that is not enough, recent news on magma activity at the Bárðarbunga volcano in Iceland has sent further tremors through the industry that another disruption of air transportation is on its way. Back in 2010, more than seven million passengers were stranded worldwide due to the eruption of the Eyjafjallajökull volcano in the same country, bringing Europe’s most important airports and air traffic to a standstill. Although an eruption of the Bárðarbunga volcano is still far from certain, a possible subglacial eruption of ash could create a further hazard for the airline industry.
That said, the industry is much more prepared for such an eventuality this time round. Nevertheless, if the Bárðarbunga volcano were to erupt, some of the hardest hit carriers would be those operating in Europe, such as Lufthansa, AirFrance-KLM, British Airways or Ryanair.
As a direct result of the ash crisis in 2010, major airlines recorded heavy losses – for example, British Airways recorded losses of £90-120 million during the 6-day period when it cancelled services. These types of events are unavoidable, and could force airlines to deviate traffic to avoid the risk of flying through ash or finding airports suddenly closed. While many passengers will be rebooked, it is likely that airlines will incur huge losses, while the summer season will see weaker results.