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Rising oil prices, crisis to hit aviation sector

Issac John / 23 February 2011

DUBAI — With oil prices soaring to new highs, the Middle Eastern crisis is set to render a severe blow to the aviation sector, which was on track to make profits this year.

The political turmoil in the Middle East has raised the oil prices that are expected to touch $115- $120 per barrel within the next two weeks if the turmoil worsens. As the   aviation turbine fuel prices account for a major portion of the operational expenses,  the situation would result in a reversal of fortune for global airlines with more losses in the current year, Frost & Sullivan, a global growth consulting company, forecasts.

Analysts said the surging cost of jet fuel, which is most airlines’ single-biggest expense, will put airlines in a spot.

The global airline industry lost $16 billion in 2008 and $9.9 billion in 2009. Following a turnaround, airline industry would gain $15.1 billion in profits in 2010 as expected by the International Air Transport Association. The IATA expects full-year 2011 to be tough and profits to soften to the level of $9.1 billion. “Tougher conditions are likely to stem from rising fuel costs, stable yields, weak traffic volumes, slower global growth and increased taxation, particularly in Europe, which are expected to suppress demand for air travel,” it said.

Frost & Sullivan believes that the Middle Eastern crisis had also restrained the inflow of tourists into the region, especially in countries like Egypt and Tunisia.  “The economies of Egypt and Tunisia are strongly supported by tourism and these economies are in grave danger if the tourist inflow does not get back to normal. Another key threat is the rise of political unrest in the region which would impact the aerospace sector at all levels.”   The consulting company said the key area that would feel the crisis impact is the offset sector where the foreign investors would be reluctant to procure from this region.

“The continuation of political turmoil would also lead to a dip in the defence budgets in the region. There is also a risk of civil war in the region which would lead to the unstable airport infrastructure, airline operators and maintenance, repair, operations , or MRO, market apart from destabilising the entire economy of the region.

Libya produces about 1.6 million barrel of oil, majority of which is exported to Europe. Saudi Arabia would need to increase its production to cater to the European needs, failing which the economies in Western countries would be in a risk because the oil prices would increase. This would risk the stability of the economy as the oil prices form a part of the inflation, Forst & Sullivan said.

If the oil prices continue to rise it will be bad news for aircraft manufacturers, airline leasers, component manufacturers, airports and the MRO houses, the consulting frim said.

Goldman Sachs has warned that Brent crude oil futures may trade between $105 and $110 a barrel in coming weeks if uncertainty in Libya continues.  Prices may reach a record if unrest spreads to larger producers in the Middle East, such as Saudi Arabia, he said.

“The real key is the contagion risk. Then prices could test historical highs,” said Goldman Sachs.

Brent jumped as high as $108.18 in electronic trading on the London-based ICE Futures Europe exchange on Tuesday.  OPEC ministers meeting on the sidelines of an international conference in Riyadh are unlikely to increase output even though unrest across the Middle East are driving prices to dizzying heights.issacjohn@khaleejtimes.com

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