Airlines will see profits plunge 78% warns Iata

Airlines are expected to make just a fifth of the profits they made last year as higher oil prices increase the cost of flying and deter cash-strapped customers, their industry body has warned.

The International Air Transport Association (Iata), which represents most global carriers, yesterday slashed its 2011 profit forecast for the industry by more than half to $4 billion (2.4bn), compared with $18bn last year - a 78 per cent fall.

This is based on average oil prices of $110 a barrel.

The latest forecast represents a significant deterioration on earlier estimates when it was thought profits would fall by almost a half to $8.6 billion.

Iata's director general, Giovanni Bisignani, told the group's annual meeting in Singapore that the efficiency gains of the last decade and the strengthening global economic environment were balancing the high price of fuel, but warned: "With a dismal 0.7 per cent margin, there is little buffer left against further shocks."

Some airlines have raised prices in response to the cost of fuel, but higher fares are putting off value-sensitive leisure customers.

Passenger demand is still expected to grow 4.4 per cent in 2011, but that is below previous estimates and means capacity is likely to increase more than demand, as airlines had been expanding following a strong recovery from the recession last year.

Bisignani has said a lack of discipline could dent the industry's recovery as airlines jostle for market share.

Airline profits have also taken a knock from a drop in activity in Japan following the 11 March earthquake, and from the increasing political turmoil in the Middle East and North Africa.

Iata also warned of a looming trade war if Europe moves ahead with plans to force airlines to join an emissions trading scheme next year. China has said it would support legal action against the scheme, which would force carriers travelling to or from Europe to buy permits for each tonne of carbon dioxide they emit above a certain cap.

Airlines say the move will only increase costs and add to pressures already caused by the sluggish global economy.

In a move with further cost implications for airlines, industry sources said yesterday that Rolls-Royce plans to build a new engine to beef up the A350 jetliner being developed by Airbus.

Until now, Airbus and Rolls had defended the engine as an all-rounder capable of powering three separate models of the mid-sized A350, which is designed to carry 270 to 350 people.