Report – High Fuel Prices Responsible for European Airlines's Record Losses of about $600 Million in 2013

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The global commercial aircraft sector is expected to experience a slow and stable growth during the forecast period. Airline companies around the world are expected to procure approximately 34000 airplanes during the 2011-2031 periods according to Boeing’s estimates.
The commercial aircraft market grows parallel to the civil aviation markets across all major countries. With the civil aviation market improving steadily following the recent economic recession, the airline companies are spending significantly to replace their ageing aircraft fleets.
Additionally, the expansion plans of airlines from major emerging markets of the Asia Pacific region, the Middle East, and Europe has initiated a series of contracts for aircrafts of various types during the last few years.
The global air traffic has also grown substantially with the surge in the number of passengers preferring air travel. These factors are therefore expected to cumulatively drive the commercial aircraft market during the forecast period.

One of the major challenges being faced by the industry is the sheer expense involved in developing a new commercial aircraft. A good example of this is the US$32 billion that Boeing spent to develop its 787 Dreamliner, due to which it doesn’t expect to see any profits for the next 10 years at least; the company’s initial estimate was a development cost not exceeding US$6 billion. According to Adam Pilarski, Senior Vice President with the aviation-consulting firm Avitas, even though the 787 Dreamliner may be the best commercial plane ever built, its development is likely to result in heavy losses for the company. Similarly, the development costs for Airbus’s A380 have topped US$18 billion and this aircraft too could result in the company incurring losses. Delivery delays for the 787 are also expected to add to the problems faced by Boeing.

Commercial airlines incur the highest expenditure on fuel, with over 33% of airlines’ total cost resulting from fuel spending. This is why the current steady increase in fuel prices globally poses such a significant risk to the overall sustainability of the industry. In today’s economic climate when carriers are competing fiercely for market share, fuel prices play a major role in determining profitability.
The industry’s global trade body, the International Air Transport Association (IATA) has recently cut its forecast for the sector’s annual profits by US$500 million due to the threat posed by rising fuel prices. According to Tony Tyler, IATA’s Director-General, European airlines are heading for record losses of about US$600 million in 2013, with the collapse of two carriers, Barcelona-based Spanair and Hungary’s Malev cited as examples; high fuel prices were deemed to be the major reason for this.
Considering the global economic growth which is currently pegged at 2%, the global aviation industry is under considerable threat from rising fuel prices and industry think tanks are now asking governments to re-think regulations such as the controversial carbon tax being imposed by the European Union on the industry.

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