Cost cutting isn't enough to save airline profits

Cost cutting isn't enough to
save airline profits

The world's airlines lost a total of $6.57 billion in 2003 according to estimates of the International Civil Aviation Organization (ICAO). Carriers in the 188 nations that are members of the ICAO reported a 0.9% operating loss, which was a marginal improvement over the 1.6% operating loss reported in 2002. Revenues increased to $312.9 billion, while operating costs rose to $315.7 billion.

While passenger traffic was adversely affected by a SARS outbreak in early 2003, freight traffic increased both internationally and domestically, according to the ICAO, with a 5% increase for freight and a 1% increase for mail (or a 2% overall increase) from 2002. Of the total freight volume handled by member airlines, 83% moved internationally in 2003.

According to Giovanni Bisignani, CEO of the International Air Transport Association, the air transport industry is being strangled by overregulation, soaring fuel prices and government fees. He cautions that the industry will post $3 billion in losses in 2004 if oil prices remain at an average price of $36 per barrel.

Bisignani is indignant about governments passing on security costs to airlines and their customers. “Last year, the industry paid over $5 billion for security measures. States must defend their citizens in trains, discos, public parks or at home. Why are citizens who travel by air forced to pay for their own security?” he asks rhetorically.

In the first quarter of 2004, Bisignani notes, traffic levels for North American carriers were 2.8% below 2001, while European carriers were up 7.5%.

Meanwhile, the Air Transport Association of America (ATA) characterizes the economic health of the U.S. airline industry as “tenuous.” This is in spite of the fact that passenger levels have returned to pre-9/11 levels. But “new costs beyond the airlines' control” have erased efforts to cut costs and achieve new efficiencies. Among these are the costs of fuel and security.

The ATA's prescription for improving the health of U.S. airlines includes treating security costs as a national defense priority and funding them accordingly, a statutory extension of the war-risk insurance program and ensuring policy decisions support stability and growth in the airline industry.

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August, 2004

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