The International Air Transport Association (IATA) revised its 2010 industry outlook up and is now projecting a profit of $8.9 billion (up from the $2.5 billion forecast in June). But, in its first look into 2011, IATA estimates that profitability will drop to $5.3 billion.
“The industry recovery has been stronger and faster than anyone predicted. The $8.9 billion profit that we are projecting will start to recoup the nearly $50 billion lost over the previous decade. But a reality check is in order. There are lingering doubts about how long this cyclical upturn will last. Even if it is sustainable, the profit margins that we operate on are so razor thin that even increasing profits 3.5 times only generates a 1.6 percent margin. This is below the 2.5 percent margin of the previous cycle peak in 2007 and far below what it would take just to cover our cost of capital,” said Giovanni Bisignani, IATA’s Director General and CEO.
The improved outlook for 2010 is being driven by a combination of factors. On the revenue side increasing demand and disciplined capacity management are leading to sharply stronger yields pushing revenues higher. At the same time, costs remain relatively stable, IATA says.
Highlights of IATA’s analysis:
Demand and Capacity: Rapidly improving demand has pushed traffic 3-4 percent above the pre-crisis levels of early 2008. Demand in 2010 is expected to grow by 11 percent (stronger than the previous forecast of 10.2 percent) while capacity will only expand by 7.0 percent (up from the previous forecast of 5.4 percent).
Yields: Yield improvements are the most important factor driving the improved outlook. On top of last year’s capacity cuts, capacity expansion is lagging behind demand improvements. The result is higher load factors and some pricing power for airlines. More business travelers on premium seats are also boosting average yields. Yields are now expected to grow by 7.3 percent for passenger and 7.9 percent for cargo. This is sharply higher than the 4.5 percent previously projected for both. Even with this improvement, yields are still 8 percent below the pre-crisis levels of 2008.
Revenues: Revenues are expected to grow to $560 billion, $15 billion more than previously forecast. This is only slightly below the $564 billion in revenues achieved in 2008 when the previous economic cycle peaked and prior to the start of the financial crisis.
Fuel: The revised outlook maintains an average full-year crude oil price of $79/barrel. However, excess refinery capacity is pushing the “crack spread” slightly lower than previously anticipated resulting in lower prices for jet fuel. Even with stronger traffic the total fuel bill is now forecast to be $137 billion, $3 billion lower than forecast in June. Fuel continues to account for about 25 percent of industry costs.
On a regional basis, North American carriers are now forecast to make $3.5 billion (up from $1.9 billion), IATA said. US airlines cut capacity significantly as fuel prices spiked in 2008 and maintained a cautious approach to reinstating capacity to the market this year. The US economy and the resulting freight and air travel growth have grown at a better pace than in Europe. As a result, US airlines have seen a much larger rise in yields than other regions.
IATA said that the industry outlook grows weaker in 2011. “The impact of the post-recession bounce from re-stocked inventories will dissipate. Consumer spending is not expected to pick-up the slack as joblessness remains high and consumer confidence falls in Europe and North America. Travel and freight markets will remain stronger in regions such as Asia, the Middle East and South America but we do not expect these hot spots to be able to sustain global growth in 2011”
“This year (2010) is as good as it gets for this cycle,” Bisignani said. “Governments are running out of cash for pump priming. Unemployment remains high and business confidence is weakening. And we expect the 3.2 percent GDP growth of 2010 to drop to 2.6 percent in 2011. As a result, 2011 is looking more austere. We see profitability falling to $5.3 billion with a margin of 0.9 percent,” said Bisignani.