IATA Sees Risks in Weak Airline Profitability

The deepening European sovereign debt crisis, which has led markets to expect  further damage to economic growth, remains a major concern for international airlines, the International Air Transport Association (IATA) says.

2012 will be the second year of declining returns since airline profits peaked in 2010 at $15.8 billion with a net profit margin of 2.9 percent, IATA said, as it released its revised industry outlook for 2012.

IATA said global industry profits are expected to be $3.0 billion, unchanged from the last update in March. In 2011, industry profits fell to $7.9 billion for a 1.3 percent net profit margin. This year’s projected $3.0 billion industry profit would yield a net profit margin of just 0.5 percent, IATA estimates.

Compared with the previous forecast in March, North American and Latin American carriers are expected to see improved prospects, IATA said. The outlook for African carriers is unchanged. But the outlook for European, Asia-Pacific and Middle Eastern carriers has been downgraded, with European losses now expected to be $1.1 billion (nearly double the previously forecast $600 million loss).

“The $3.0 billion industry profit forecast has not changed. But almost everything in the equation has. Demand has been better than expected, so far this year. And fuel prices are now lower than previously anticipated, but that’s on the expectation of economic weakness ahead. The Eurozone crisis is standing in the way of improved profitability and we continue to face the prospect of a net profit margin of just 0.5 percent,” said Tony Tyler, IATA’s director general and CEO.

“Although airlines face the common challenges of high fuel prices and economic uncertainty, the regional picture is diverse. Carriers in the Americas are seeing improved prospects for 2012. The rest of the world is seeing reduced profitability. For European carriers, the business environment is deteriorating rapidly resulting in sizable losses,” said Tyler.

As the Eurozone crisis deepens, IATA's revised forecast is based on a weaker European economic environment than previously forecast in March. IATA said its forecast assumes that the worsening of the Eurozone situation is limited and does not deteriorate into a widespread banking crisis, that the US economy continues to recover, but at a mediocre pace and that Chinese economic growth slows, but a hard landing is avoided by policy stimulus.

World GDP growth, a key driver of airline profitability, is expected to be 2.1 percent in 2012. That is slightly better than the anticipated 2.0 percent growth forecast in March. But,  says IATA, is is still a slower growth environment than last year, and one in which airlines will struggle to recover cost increases. Historically, the airline industry has fallen into losses (at a global level) when world GDP growth drops below 2.0 percent, says IATA.

Fuel is expected to account for 33 percent of airline operating costs, the same as in 2008 when oil prices spiked. 

The strongest markets have been those linked with Asia, Latin America, and the Middle East, where economies have been more robust. However, a weaker second half of the year is expected as deepening problems in Europe damage confidence, IATA says.

The strength of travel demand in the first part of 2012 has caused an upward revision to the forecast for air travel growth to 4.8 percent from 4.2 percent in the previous forecast. Passenger numbers are expected to reach 2.966 billion this year, up from 2.835 billion in 2011, IATA says.

Keeping revenues ahead of costs is the constant challenge in the airline industry, IATA says. In 2012, operating revenues are expected to reach $631 billion, while operating costs will grow to $623 billion. The resulting operating profit or EBIT of $8.6 billion reflects the narrowness of the gap between revenues and costs.

North American carriers are expected to post a profit of $1.4 billion. That is up from the March projection of $0.9 billion and a slight improvement on the $1.3 billion that the region’s carriers made in 2011, IATA says. European carriers are expected to post the industry’s largest aggregate losses of $1.1 billion as the Eurozone crisis continues.

“There has been no let-up in the volatility of the economic environment. A few months ago, an oil price crisis was the biggest risk. Now all eyes are back on Europe. Markets are expecting the Eurozone sovereign debt crisis to intensify and economic damage to follow. But with little clarity on how European governments will manage the situation beyond providing further liquidity, the risk of a major downward shift in economic prospects is very real. The next months are critical and the implications are big,” said Tyler.

Visit www.IATA.org


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