Higher interest rates another headache for airlines

The BIS yesterday stated, in the aftermath of a long credit-driven boom, it would “not be surprising to see turmoil in financial markets, slowing real growth and temporarily rising inflation”, adding, “while difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect”.

At the same time, the BIS warned inflationary forces, particularly in emerging market economies, could also prove unexpectedly strong and persistent. For the emerging market economies, which depend significantly on external demand, the BIS stated developments in the advanced industrial economies could still pose major challenges.

But at its core, the report is scathing of the policies of central banks that allowed the turmoil gripping financial markets to develop through the “build-up of credit excesses”.

The BIS concluded that with inflation a clear and present threat, and with real policy rates in most countries very low by historical standards, “a global bias towards monetary tightening would seem appropriate”.

Higher global interest rates could pose yet another threat to the airline industry. On the demand side, higher rates would lower discretionary income available for services such as travel and tourism, while on the airlines' cost side, debt-servicing increases.

In its annual report released last month, the International Air Transport Association (IATA) stated that losses exceeding USD42 billion over the past six years have resulted in a “large rise in indebtedness, particularly for US airlines”. IATA stated that balance sheets remain vulnerable to the type of market shocks that have hit the industry in recent years.

According to the industry body, airline debt has risen to almost USD200 billion globally, which is around three times the equity in the industry, a ratio almost double that in 2000 – a ratio that would have swollen as airline stocks continue to weaken. “There is simply no cash to cushion the industry from possible future shocks”, concluded IATA.

With a fuel price shock already raging, the global airline industry can ill afford a spike in global interest rates. But the alternative could be far worse.

Read the Bank for International Settlements’ Annual Report overview here.