The International Air Transport Association (IATA) has downgraded its industry outlook for 2011 to $8.6 billion from the $9.1 billion it estimated in December 2010. This is a 46 per cent fall in net profits compared to the $16 billion (revised from $15.1 billion) earned by the industry in 2010. On expected industry revenues of $594 billion, the forecasted $8.6 billion 2011 profit equates to a net profit margin of 1.4 per cent. The organisation has highlighted the political tensions in the Middle East and North Africa and rising fuel prices as the reason for the revision.
“Political unrest in the Middle East has sent oil over $100 per barrel,” said Giovanni Bisignani, Director General and CEO, IATA, “and this is significantly higher than the $84 per barrel that was the assumption in December. At the same time the global economy is now forecast to grow by 3.1 per cent this year—a full 0.5 percentage point better than predicted just three months ago. But, stronger revenues will provide only a partial offset to higher costs. Profits will be cut in half compared to last year and margins are a pathetic 1.4 per cent.”
IATA estimates that including the impact of fuel hedging, which is roughly 50 per cent of expected consumption, the industry fuel bill will rise by $10 billion to a total of $166 billion. Compared to levels in 2010, oil prices will be approximately 20 per cent higher this year representing around 29 per cent of total operating costs (up from 26 per cent last year). However, an increase in global GDP forecasts to 3.1 per cent (from 2.6 per cent in December) bodes well for continuing strong demand for air transport and IATA has revised its passenger demand growth forecast to 5.6% (from 5.2%) and its cargo growth forecast to 6.1% (up from 5.5%).
Published airline schedules indicate a capacity increase of six per cent, slightly lower than previously forecast, with five per cent coming from the 1,400 new aircraft due to be introduced in 2011 – the additional one per cent is expected to come from what IATA describes as “the normalisation of underutilised capacity in the twin-aisle fleet”. So, with capacity expected to increase by six per cent in 2011 and demand by 5.7%, the gap is 0.3 percentage points. This has narrowed from the previously forecast gap which was 0.8 percentage points. These tightening supply and demand conditions give scope for yield improvements. Passenger yields are expected to grow by 1.5% (up from the previous forecast of 0.5%) and cargo yields by 1.9% (up from the previous forecast of no growth), according to IATA.
Rising oil prices are always a challenge for airline profitability. If they are accompanied by strong growing economies and world trade, airlines have some opportunity to command prices that can offset the rising costs. If, however, rising energy prices stall global economic growth there is a strong downside risk and with oil prices now being driven by speculation on geopolitical events in the Middle East rather than strengthening economic growth, this is a significant downside risk.
“This year the industry is performing a balancing act on a very thin tight-rope of a 1.4 per cent margin,” said Bisignani. “There is very little buffer for the industry to keep its balance as it absorbs shocks. Today oil is the biggest risk. If its rise stalls the global economic expansion, the outlook will deteriorate very quickly.”
IATA also highlighted the risk of increasing taxation, particularly in price sensitive leisure markets. In 2010, the industry saw new and increased taxes in the range of 3-5 per cent of ticket prices in the UK, Germany and Austria. Recently, Iceland, India and South Africa have joined with plans for additional taxation.
“This is a price sensitive business. Aviation has the power to stimulate economies. But that ability is being compromised by adding taxes at a time when we are struggling to cope with high fuel prices just to maintain anemic margins,” noted Bisignani.
Airlines from the Asia Pacific region are expected to deliver the largest collective profit of $3.7 billion and the highest operating margins of 4.6 per cent, according to IATA. This is down substantially from the $7.6 billion that the region’s carriers made in 2010 and from the previously forecast $4.6 billion for 2011. While the strong economic growth in the region is still driving profitability, inflation fighting measures in China are slowing trade and air cargo demand. “The key reason for the downgrade from December’s forecast is that the region is more exposed to higher fuel prices, due to relatively low hedging on average,” said IATA.
North American carriers are expected to deliver $3.2 billion profit, unchanged from the previous forecast and down from the $4.7 billion profit made in 2010. Higher oil prices will damage profitability in 2011, but earlier cuts in capacity have “led to much stronger conditions for yields than elsewhere,” said IATA. The US economy has also been stronger than IATA expected.
In Europe, carriers are expected to make a $500 million profit. This is up from the $100 million previously forecast, but well below the $1.4 billion that the region’s carriers made in 2010. “It is the carry-over from better than expected 2010 second-half performance that has led to forecast revisions,” said IATA. The ongoing banking and government debt crisis are keeping domestic home markets fragile. But the weak Euro is continuing to provide stimulus to export industries, outbound freight and long-haul business travel which is driving the upgrading of the region’s profit forecast. Even so, Europe’s carriers remain the least profitable among the major regions with an EBIT margin of 1.1 per cent.
In the expanding Middle East market carriers are expected to return a profit of $700 million. This is considerably better than the $400 million previously forecast, but down from the $1.1 billion profit that the region posted in 2010. Political instability in the region will certainly take its toll in Egypt, Tunisia and Libya which combined account for about 20 per cent of the region’s international passenger traffic. This is balanced by the Gulf area which benefits from economic activity related to high oil prices and whose hubs continue to win long-haul market share. “Load factors have also improved significantly for these airlines, as new capacity is being added at a slower pace than demand increases,” noted IATA.
Latin American carriers are forecast to post a $300 million profit. This is down sharply from the $1 billion that the region made in 2010 and from the previously forecast $700 million. Strong economic growth and international trade in the region are driving travel and cargo demand and the region’s profits for airlines. However, greater “exposure to higher oil prices” is the key reason for IATA’s expected deterioration in the region’s profitability this year.
African carriers are expected to break even. This is unchanged from the previous forecast but down from the $100 million profit that the region posted in 2010. “Strong economic and transport demand growth” on the back of “foreign direct investment” and “rapidly growing trade links with Asia” will keep the region’s carriers out of the red, according to IATA. However, they face intensifying competition from international rivals particularly in the Middle East for lucrative business traffic.
Related Content
