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Canadian airlines expected to buck trend of global losses set to exceed $5 billion

Sept. 4, 2008, Montreal, Que. - Canadian airlines appear to have some insulation against a perfect storm that will force the world's airlines to post losses exceeding US$5.2 billion this year due to because of soaring fuel costs and a sluggish economy, an airline-watching agency says.


September 4, 2008
By The Canadian Press

Sept. 4, 2008, Montreal, Que. – Canadian airlines appear to have some insulation
against a perfect storm that will force the world's airlines to post
losses exceeding US$5.2 billion this year due to because of soaring
fuel costs and a sluggish economy, an airline-watching agency says.

American carriers are tapped to suffer the most, accounting for
the bulk of global airline losses, the International Air Transport
Association said Wednesday in a revised industry forecast.
The huge loss, which doesn't account for billions of dollars in
restructuring costs at airlines, will reverse a $5.6-billion profit
in 2007, IATA said.
“We are in a perfect storm of rising costs, particularly oil,
and falling demand,''

IATA director general Giovanni Bisignani said
in a news conference from the association's Montreal headquarters.
Bisignani identified Air Canada (TSX:AC.B) as one of the most
profitable network carriers last year, earning a record $433 million
in operating income. The airline's EBITDAR, a measure of operating
cash flow, was 10.9 per cent for the year and nine per cent in the
latest quarter.
Canada's largest airline _ and its domestic rival WestJet  are both expected to remain profitable in 2008 as they
struggle to cut costs and impose surcharges to offset higher fuel
expenses.
The two airlines have young fleets of fuel-efficient aircraft and
benefit from a relatively strong domestic market.

To top that off,
Air Canada has promised to cut capacity by seven per cent this fall,
laying off about 2,000 employees.
Factoring out the struggling U.S. carriers, the health of the
world's airlines is actually stronger than IATA suggests, despite
the challenges of soaring fuel costs, said aviation analyst Jacques
Kavafian of Research Capital.

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“We think the airline industry next year will return to
profitability provided oil doesn't go crazy,'' he said in an
interview.
The United States is an important global player, with its
transatlantic market representing two-thirds of all aviation
business. North American airlines earned $2.8 billion in 2007, but
the domestic market has shrunk by 2.5 per cent so far this year.
IATA expects airline profits will shrink in Asia Pacific, Europe
and the Middle East, while losses will mount in Latin America and
Africa.
In June, IATA forecast losses would range between $2.3 billion
and $6.1 billion.
The revised forecast is based on an average crude oil price of
US$113 per barrel or US$140 for jet fuel.

The increase from US$73
per barrel a year ago has raised total fuel bills by US$50 billion
to an estimated US$186 billion.
Challenging market conditions in 2009 are expected to result in
US$4.1 billion of additional losses as weaker economic growth
expands beyond the United States.
“I think 2009 will still be a very, very difficult year, so
fasten your seatbelt for at least another two years,'' Bisignani
said.
Although oil prices have recently fallen, they are still about 55
per cent higher than last year. Airlines should be able to break
even if oil falls below $95 per barrel next year, he said.
In July, passenger traffic fell 1.9 per cent compared to 2007,
the lowest level in five years.

 Capacity increased by 3.8 per cent,
indicating that service cuts have not kept pace with falling demand.
Cargo demand also contracted for the second straight month,
falling 1.9 per cent, with Asian carriers experiencing a 6.5 per
cent drop. The decline is considered a barometer of the economic
health since the region represents more than half of the global air
cargo market.
Airlines have confronted rising fuel costs by cutting non-fuel
costs by 18 per cent since 2001, with a further 6.4 per cent drop
expected this year.
The industry faces a situation that's worse than the aftermath of
the Sept. 11, 2001 terrorist attacks when 11 carriers went bankrupt.
So far this year, 26 airlines have suspended service, including last
week's decision by Canada's Zoom Airlines to stop flying.

Another 11 to 15 airlines worldwide are on an IATA watch list.
“The industry is in a very fragile situation and we need major
changes in a number of areas,'' Bisignani said.
The former Alitalia CEO called on governments to reduce taxes,
airport fees and other charges. While Bisignani applauded recent fee
cuts at Toronto's Pearson airport, he said customers will pay the
burden for constructing “cathedrals'' for the next 40 years.
Governments also need to remove the roadblocks to greater
consolidation in the industry, he said.
There are more than 1,000 airlines around the world. Other
important sectors such as steel, pharmaceutical, chemical, food and
autos have much fewer players, he said.
“We need government to think boldly, to update those kinds of
rules of the game. We need commercial freedom to act as a normal
business.''


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