Last month, Spirit Airlines, the United States' eighth-largest carrier, went bankrupt under the strain of surging oil prices, and as profitability across the industry deteriorates, more airlines are expected to shut down or be bought in mergers and acquisitions (M&A) by large carriers.
Willie Walsh, head of the International Air Transport Association (IATA), lowered this year's airline industry revenue outlook at the group's annual meeting in Rio de Janeiro, Brazil, and said, "Some small airlines could go bankrupt or be acquired by large carriers this year and next."
Walsh said, "This is a particularly difficult time for airlines that have not yet recovered from the financial distress caused by COVID-19." The industry expects management challenges to deepen for low-cost carriers (LCCs) that compete on low fares.
IATA, which accounts for 85% of global air traffic, estimates combined net profit for the airline industry this year at $23 billion (about 36 trillion won), roughly half of the previous forecast of $41 billion (about 64 trillion won). That is also close to half of last year's estimated result of $45 billion (about 70 trillion won). The net margin is likewise projected to fall to 2.0% from the previous 4.2%.
Reuters said, "This downgrade in earnings guidance shows how vulnerable airlines are to geopolitical shocks and oil price volatility, even as passenger demand remains firm and load factors and sales rise." Airline industry revenue is expected to top $1.1 trillion (1,704 trillion won) this year.
The primary cause of worsening profitability is the jump in jet fuel prices due to the Iran war. After the war broke out in February and the Strait of Hormuz was closed, global crude transport was disrupted and jet fuel prices nearly doubled. IATA expects jet fuel prices this year to rise 70% from a year earlier to an average of $152 per barrel.
Rising jet fuel prices are also increasing airlines' cost burdens. Jet fuel is expected to account for 31.4% of airlines' total operating expenses this year. Fuel costs are projected to surge from $252 billion (about 390 trillion won) last year to $350 billion (about 542 trillion won) this year. As a result, net profit per passenger is analyzed to drop to about half, from $9.10 last year to $4.50 this year.
Aging aircraft are also adding to airlines' burdens. With Boeing and Airbus delaying deliveries, the global average aircraft age has surpassed 15 years, forcing airlines to operate older, less fuel-efficient models longer. Accordingly, airlines' fuel costs are expected to increase by roughly $11 billion (about 17 trillion won).
Walsh said, "Airlines are operating less efficient aircraft for longer, which is increasing their fuel cost burden," and added, "They are missing opportunities to improve efficiency, while maintenance expenses and aircraft lease rates are also rising."
IATA projected that while most regional airlines will remain profitable, Middle Eastern carriers are likely to swing to losses. Gulf carriers such as Emirates, Qatar Airways, and Etihad Airways were hit hard as regional airspace was effectively closed across the board in the early days of the war.