IATA: Airlines Face Weak Economy, Weak Profits

The airline industry may face tough going in 2012, the International Air Transport Association (IATA) reports. IATA upgraded its industry profit expectations to $6.9 billion (up from $4.0 billion projected in June), but emphasized that, despite the improvements, profitability at these levels is still exceptionally weak (1.2% net margin) considering the industry’s total revenues of $594 billion.


In its first look at 2012, IATA is projecting profits to fall to $4.9 billion on revenues of $632 billion for a net margin of just 0.8 percent.


“Airlines are going to make a little more money in 2011 than we thought. That is good news. Given the strong headwinds of high oil prices and economic uncertainty, remaining in the black is a great achievement,” said Tony Tyler, IATA’s director general and CEO. “But we should keep the improvement in perspective. The $2.9 billion bottom line improvement is equal to about a half a percent of revenue. And the margin is a paltry 1.2 percent. Airlines are competing in a very tough environment. And 2012 will be even more difficult,” said Tyler.


IATA’s forecast is built around global projected GDP growth of 2.5 percent in 2011 falling to 2.4 percent in 2012. Airline financial performance is closely linked to the health of world economies, IATA notes. Whenever GDP growth has slowed below 2.0 percent the airline industry has lost money. “We will be perilously close to that level at least through 2012. The industry is brittle. Any shock has the potential to put us in the red,” said Tyler.


Passenger demand has been stronger than anticipated given the gloomy economic outlook, IATA says. The forecast for the year stands at 5.9 percent growth (up from 4.4% projected in June). In the year to July, passenger volumes were up over 6 percent on previous levels. This would bring total passenger numbers to 2.833 billion (up from the previous forecast of 2.793 billion).


World trade basically stopped growing at the end of 2010, IATA says. "The strong travel trend in 2011 is built on residual confidence from economic optimism at the beginning of the year. While some economies may be more durable—China for example—the overall outlook is for a weaker end to 2011."


Asset Utilization: Airlines managed to restore passenger load factors back to the 2010 highs. By July the global passenger load factor stood at 83.1 percent. Airlines met the better than expected passenger demand with more intense asset utilization. As much of this capacity also came with belly space for cargo, the freight load factor sank to 45.0 percent by July.


Yields: Tighter supply and demand conditions in passenger markets over the first half of the year are expected to offset the impact of a weaker second half. As a result our passenger yield growth projection is unchanged at 3.0 percent. However, an oversupply of belly cargo capacity is expected to see no improvement in freight yields in 2011 (down from our previous projection of 4.0% growth).


Revenues: Industry revenue projections are relatively unchanged. Stronger passenger markets will see passenger revenues rise to $464 billion (up $7 billion from the June forecast). Meanwhile, weaker freight markets will see freight revenue projections fall to $67 billion (down $5 billion compared to the June forecast).


Fuel: Oil prices have remained consistent with the previous forecast of $110/barrel (Brent Crude). This is 39 percent higher than the $79.4 average price of 2010. A total fuel bill of $176 billion is expected to account for 30 percent of industry costs.


North American carriers are expected to deliver a net profit of $1.5 billion (+$300 million compared to the June forecast). The weak US economy continues to put a damper on the potential for profitability improvements. The region’s EBIT margin of 3.0% of revenues ranks second to Latin America (at 3.4%).


The overall industry outlook grows weaker in 2012, IATA says. "Debt-burdened Western economies look set for an extended period of weak economic growth—or worse. While developing economies look to be in much better shape, the prospects for industry growth are limited because many transport linkages are with developed nations. The fourth quarter of 2011 and the first half of 2012 may well see the weakest point for air transport markets."


“It looks like we are headed for another year in the doldrums. With business confidence declining, it is difficult to see any potential for significant profitable growth. Relatively stronger economic growth and some rebound in cargo will help Asia Pacific airlines to maintain their 2012 profits close to 2011 levels at $2.3 billion. The rest of the industry will see declining profitability. And the worst hit is expected to be Europe where the economic crisis means the industry is only expected to return a combined profit of $300 million. A long slow struggle lies ahead,” said Tyler.


“As governments seek to re-start troubled economies, a strategic approach to aviation policy would deliver broad economic benefits. Every plane that takes off is a catalyst for economic growth and prosperity. Governments must carefully evaluate the negative impact of the current high levels of taxation, absolutely resist increases or new taxes, and develop policies that support aviation’s growth with efficient infrastructure. Time and again aviation has shown its resilience. People need and want to travel. Now is the time to harness the economic possibilities that this presents,” said Tyler.

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