Oil prices pose 'severe challenge' to airlines

Oil prices pose 'severe challenge' to airlines

Analysts and airline association IATA warn the high oil price is putting carriers at risk following a decline in the growth of passenger traffic.

The price of oil hit a three-month high last week, with cost of Brent crude, the global benchmark, at almost $118 a barrel.

Hungarian carrier Malev and Spanish airline Spanair failed the previous week, with the oil price a contributory factor.

Consulting analyst Lida Mantzavinou of Frost & Sullivan aerospace said: “The European air transport industry faces serve challenges, starting from the increasing jet fuel price.”

At the same time many carriers would struggle to obtain credit, Mantzavinou warned, saying: “The economic crisis in Europe makes banks reluctant to support businesses that carry high risk.”

IATA reported a business confidence index among airline chief financial officers in January which found: “A majority report deteriorations in profitability in the fourth quarter [and] the trend is expected to continue. There was a particularly sharp decline in expectations for traffic growth.”

The association said: “The persisting weak economic conditions could finally be starting to take a toll on passenger travel. Profit and traffic expectations have fallen to levels seen at the start of 2009.”

Aviation analyst Chris Tarry agreed. In an analysis prepared for IATA, Tarry said: “Fuel remains the big swing factor, with a current expectation that the industry’s fuel bill will be higher in 2012.”

The price of Brent crude has risen 10% so far this year amid tension with Iran – a major oil producer. The dollar oil price is 15% higher than a year ago. However, the rise in the sterling price is greater because of the fall in the value of the pound – up 40% in 18 months.

The cost of oil may keep UK inflation higher than government and Bank of England forecasts, squeezing household income and hitting spending.

Latest figures show the government’s preferred inflation rate – the Consumer Prices Index – fell from 4.8% to 4.1% in January.

However, the rate remains more than double the average rise in earnings.

Scotia Capital economist Alan Clarke told the Financial Times: “Consumer price inflation will prove higher than the Bank of England expects.”

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