The impact of high oil price can be seen clearly from the graph. In 2000, Jet Fuel constituted 14% of total airline cost. This climbed to 32% in 08 and forecasted at 26% for ’10 (according to IATA). This has contributed to US$ 49.1 billion losses in the airline industry during the last decade (source).  This is US$ 5 billion loss per year.

According to Scarce Whales, the global airline industry is estimated to lose US$ 5.6 billion if oil prices average US$75 per barrel (basis ICE Brent crude) during 2010.

Recent changes in accounting rules with regard to hedging have also distorted financial picture by Airline Industry. Airlines using forward contracts, write off the difference between higher contracted forward price and prevailing lower spot against income.  In ‘Out of the Money‘ ‘effective’ hedging, the non cash loss of hedging is marked-to-market and is written off against reserves while ineffective have to realize loss against their income.  IATA estimate that if these ‘Marked-To-Market’ losses are taken into account, the industry net losses in 08 will rise from $ 8 billion to $ 16-17 billion.

On the positive, narrowing of cracks between Fuel Oil and Jet Fuel, as well as recovering Ocean Fright rates, have slowed loss of market share of Air Freight to Ocean transport.

A weak US dollar (declined by 15% against Euro in 09) have had a slight positive impact on Jet Fuel cost for non-dollarised airlines.

Overall, the airline industry have combated the rising cost related to Fuel with improved efficiency in non-fuel cost in particular labour productivity. Between 2000 – 06,  Airlines improved labour efficiency by 56% taking total non-fuel cost as percentage of total cost from 28.5% to 23.3.% (IATA source).

Nevertheless, the Industry is still facing difficulties as capacity is not falling in line with demand (only USA have been able to shrink capacity in line with demand) even as research has demonstrated no correlation between size and profitability for airlines. (actually, most profitable airlines are those that serve niche market or routes). Weighted load factor achieved of 60.4% remains below Break-even of 61%.  The latest IATA traffic growth numbers (Nov 09 + 2.1% on last year compared to +0.5% in October 09) is indicating strong recovery particularly in Middle East, Asia Pacific and Latin America.

Cost of Capital for majority of airlines (average rating BB+) remains at 8% even as interest rates are at historical lows.  As a result, losses will persist and with Return on Invested Capital (ROIC) at 2 % – in short – an Industry that is hemorrhaging value for even the bravest of investors.

Middle East Airlines in 2010

2010 will see the regions airline recovering growth momentum of 12.2 % and 73.9% load factor aided by regional routes & attracting long haul connectivity via regional hubs. Emirates, Etihad and Qatar Airways continue to take market share from other regional airlines and long haul from international airlines.

Regional hubs such as Dubai has achieved stellar average annual growth in passenger traffic of 15% and 9% for Abu Dhabi. Between 1997 and 2007, passenger traffic for the two airports trebled (source InterVISTAS).

According to IATA, the sector will lose $ 300 m (majority of losses incurred by legacy Gov. owned airlines).

There is scarce information with regard to Jet Fuel hedging by regional airlines but majority have hedged around 30% -45% of total fuel consumption at good levels, taking advantage of low oil price during Q1 – Q2 of 2009.  Emirates fuel cost accounted for 35.1% (AED 14.4 billion or $ 4 billion) of total cost in 2008-09 compared to 32% in previous year.