And US Economy Will Lead The Slump

In a move that wasn't unexpected -- but still paints a gloomy picture -- on Wednesday the International Air Transport Association lowered its 2008 profit forecast for airlines worldwide, citing high fuel costs as the primary reason for the downturn.

Bloomberg reports IATA now projects airline earning will fall 11 percent next year, fueled (as it were) by higher oil prices and a US-led slump in demand.

"We've seen the US housing market go into freefall," IATA Chief Economist Brian Pearce said. "That's very negative for consumer sentiment and for passenger sentiment in markets connected to the US."

Carriers will realize that drop in earnings coming off the first year the worldwide airline industry posted a profit since 2000. IATA says airlines will post an estimated $5.6 billion in net income this year.

Pearce also says airlines will be hurt by their own avarice... as carriers take delivery of more and more airliners, without capacity to fill those seats. "Deliveries are still accelerating," he said. "We're going to be faced with a situation next year where deliveries of aircraft are rising as traffic is slowing."

Morgan Stanley analyst Penny Butcher says the industry expected profits to level off in 2008... but not necessarily the drop IATA now projects.

"The consensus has been for a flattening of growth in profitability, but IATA's numbers are actually quite negative," Butcher said. "I don't think European airlines will be immune from the drop in growth, but they may be able to do better than some other regions, particularly if most of the economic issues are stuck in the US."

Others say one year of profitability hasn't given airlines the necessary cushion to survive a long downturn. "The peak of the business cycle is over and we're still $190 billion in debt," IATA Director General Giovanni Bisignani said, adding the industry is "heading for a downturn with little cash in the bank to cushion the fall."

As ANN reported, Bisignani hinted at trouble down the line last month, when he warned a Washington Aero Club audience US carriers will be hit hard by credit woes and labor unrest... further adding to anticipated woes in 2008.

But there is some good news... at least for non-US operators. Pearce says globally, the long-term economic impact from slowing US travel demand should be minimized by growth in Latin America, the Middle East and Asia.

"This time around we're seeing some independence of growth in Asia and to a lesser extent in Europe," he said, predicting those factors will lead to a  that will "renewed upturn" in 2009. "This is a dip rather than a recession."

FMI: www.iata.org