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Rising oil prices, crisis to hit aviation sector
February 25, 2011
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  • By Isaac John


    – 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.


    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.


    said the surging cost of jet fuel, which is most airlines’ single-biggest

    expense, will put airlines in a spot.


    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.


    & 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.


    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.


    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.


    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.


    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.


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

    Goldman Sachs.


    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


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