Blame higher oil prices.
This is due to the oil price hike from US$96 to US$110 per barrel, says DMG.
Fuel, of course, is a major cost component for airlines, accounting for 30% of operating costs in full service carriers and 40% in low cost carriers.
The International Air Transport Association (IATA) is likely to cut its profit forecast for global airlines this year when it holds its AGM this coming Monday. The IATA had forecast in March that the industry would make US$8.6b (S$10.6b) in profits but that figure was based on average oil prices of US$96 per barrel which has now risen to about US$110.
IATA CEO Giovannni Bisignani said “much has happened to make us less optimistic.” While global air traffic has been growing, airlines profitability will be negatively affected by high fuel costs and shocks which includes the Japan earthquake that will dampen demand.
As full service carriers such as MAS and SIA impose fuel surcharges, they are seeing load factors fall but the low cost carriers such as Air Asia and Tiger are gaining as passengers switch to more affordable alternatives. We have a neutral rating on Tiger Airways with a TP of S$1.40, pegged to 12x Fy12F earnings.
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