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2011 Outlook: Airlines Profitable But Margins Low

December 14, 2010 By: Staff

The International Air Transport Association (IATA) revised its industry outlook for 2010 to a net profit of $15.1 billion (up from the $8.9 billion forecast in September). IATA also revised upward its projections for 2011 to a net industry profit of $9.1 billion (up from the $5.3 billion forecast in September). Net margins remain weak at 2.7 percent for 2010 and 1.5 percent in 2011.

“Our profit projections increased for both 2010 and 2011 based on an exceptionally strong third quarter performance," said Giovanni Bisignani, IATA's director general and CEO. "But despite higher profit projections, we still see the recovery pausing next year after a strong post-recession rebound. And the two-speed nature of the recovery is unchanged with European airlines continuing to underperform other regions."

Bisignani also characterized the improvements in terms of profit margins, which continue to disappoint.

“The industry is fragile and balancing on a knife edge. Any shock could stunt the recovery, as we are seeing with the results of new or increased taxation on airlines and travelers in Europe,” Bisignani said.

Shifts in industry forecasts can appear dramatic in absolute numbers, IATA said. It is important to relate them to the size of the industry to understand their significance. The $6.2 billion increase in IATA’s projection for the 2010 net profit (compared to the September forecast) is equal to just 1.1 percent of the industry’s projected $565 billion in revenue.

“Any increase in profits is a welcome step in the right direction. But the fact that we can increase our profit forecast by 70 percent and still be left with a net margin of just 2.7 percent shows just how far this industry has to go to achieve a normal level of profitability,” said Bisignani.

Major drivers for the improved 2010 forecast include: Passenger traffic growth of 8.9 percent (compared to a previous forecast of 7.7 percent); Strong passenger yield growth of 7.3 percent (unchanged from the previous forecast); Revenue growth to $565 billion (an improvement of $5 billion on the previous forecast) and an average annual oil price in line with a previous projection of $79 per barrel.

“The third quarter of 2010 was exceptionally positive in terms of passenger traffic volume. Airlines met increased demand by utilizing their fleets more intensely," Bisignani said. "Fixed costs remained constant, passenger yields firmed and the increased revenues went almost directly to the bottom line."

In sharp contrast to improved conditions for air travel, the prospects for air cargo deteriorated from the September forecast.

Yields are expected to grow by 0.5 percent for passenger traffic, an improvement on the flat growth previously forecast. Cargo yields are expected to remain flat, unchanged from the previous forecast. The operating environment will become more difficult because of the following factors:

Increased fuel cost: For 2011, the average oil price is expected to increase to $84 per barrel, up from the $79 per barrel for 2010. This will increase fuel costs to 27 percent of operating costs (up from 26 percent in 2010).
Slower GDP Growth: The 3.5 percent global GDP growth expected in 2010 will slow to 2.6 percent.
Taxation: Austerity measures, particularly in Europe, are expected to dampen demand. Significantly increased taxation in some European countries (Germany, Austria, and the UK) is increasing the cost of travel by between 3 percent and 5 percent — significant enough to discourage travel and slow the industry's recovery.

All regions are following the global trend of reduced profitability in 2011 compared to 2010. North American carriers will see a 2010 profit of $5.1 billion decrease to $3.2 billion in 2011. Since 2007, US carriers have improved profitability successfully by adjusting capacity ahead of demand changes. The weak US economic recovery will limit demand increases to 3.7 percent (below the global average of 5.3 percent).


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