Profit forecast for global airline industry slashed from $18 billion in 2010 to $4 billion in 2011 (IATA)

6.6.2011 (IFW)
 
by Damian Brett
 


The International Air Transport Association (Iata) has slashed its profit forecast
for the airline industry because of increasing oil prices, political unrest and
natural disasters.



Iata said it expected the industry to make a profit of US$4 billion in 2011,
which is a dramatic 54% lower than the $8.6 billion forecast it made in March.

It is also 78% lower than the $18 billion profit the industry recorded in 2010.

The association said that on predicted revenues of $598 billion, the industry
profit margin equated to 0.7%.

Giovanni Bisignani, Iata’s Director General and CEO, said: “That we are making
any money at all in a year with this combination of unprecedented shocks is a
result of a very fragile balance.

“The efficiency gains of the last decade and the strengthening global economic
environment are balancing the high price of fuel. But with a dismal 0.7% margin,
there is little buffer left against further shocks.”

Iata said the main reason for the reduction in the forecast was the cost of fuel.
It noted the average oil price for 2011 is expected to be $110 per barrel (Brent),
a 15% increase over the previous forecast of $96 per barrel.

For each dollar increase in the average annual oil price, airlines face an additional
$1.6 billion in costs, it said.

Iata said the high cost of fuel would also have an impact on demand growth and
predicted cargo demand is expected to increase 5.5% and not 6.1% as anticipated
earlier.

Broken down into regions, Asia-Pacific carriers are expected to earn $2.1 billion,
which is “dramatically” down on the $10 billion profit that the region achieved
in 2010.

North American carriers are expected to report profits of $1.2 billion, down
on the $4.1 billion profit of 2010, because the region’s carriers have an older,
less fuel-efficient aircraft fleet.

European carriers are expected to report a $500 million profit, down from $1.9
billion in 2010 as the sovereign debt crisis is dampening demand from some European
economies.

Middle East carriers will deliver a $100 million profit, down from $900 million
in 2010 because of the political unrest in parts of the region.

Latin American carriers are predicted to make profits of $100 million, which
is down considerably on the $900 million profit of 2010 as capacity growth of
6.9% outstrips the 6% increase growth in demand.

Finally, African carriers are forecast to post a loss, $100 million, in 2011.
This is due to political unrest across Northern Africa dampening demand. 

link to IFW article

 
 

 

see also

 

 

IATA financial forecast June 2011 at

http://www.iata.org/whatwedo/Documents/economics/Industry-Outlook-June2011.pdf

 

and slides at

Presentation (pdf)

 

and

 

IATA press release

6.6.2011

 

Airline Industry 2011 Profit Outlook Slashed to $4 Billion

High Oil Prices, Natural Disasters, and Political Unrest Take Their Toll

Singapore -The International Air Transport Association (IATA) further downgraded
its 2011 airline industry profit forecast to $4 billion. This would be a 54% fall
compared with the $8.6 billion profit forecast in March and a 78% drop compared
with the $18 billion net profit (revised from $16 billion) recorded in 2010. On
expected revenues of $598 billion, a $4 billion profit equates to a 0.7% margin.

“Natural disasters in Japan, unrest in the Middle East and North Africa, plus
the sharp rise in oil prices have slashed industry profit expectations to $4 billion
this year. That we are making any money at all in a year with this combination
of unprecedented shocks is a result of a very fragile balance. The efficiency
gains of the last decade and the strengthening global economic environment are
balancing the high price of fuel. But with a dismal 0.7% margin, there is little
buffer left against further shocks,” said Giovanni Bisignani, IATA’s Director
General and CEO.

Forecast Highlights:

Fuel: The cost of fuel is the main cause of reduced profitability. The average oil
price for 2011 is now expected to be $110 per barrel (Brent), a 15% increase over
the previous forecast of $96 per barrel.
 
For each dollar increase in the average annual oil price, airlines face an additional
$1.6 billion in costs. With estimates that 50% of the industry’s fuel requirement
is hedged at 2010 price levels, the industry 2011 fuel bill will rise by $10 billion
to $176 billion. Fuel is now estimated to comprise 30% of airline costs—more than
double the 13% of 2001.

“We have built enormous efficiencies over the last decade. In 2001, we needed
oil below $25 per barrel to be profitable. Today, we are looking at a small profit
with oil at $110 per barrel” said Bisignani.

This fuel price spike is substantially different from the one that occurred in
2008. First, while oil inventories are low, there is substantial spare OPEC and
refinery capacity, which was not the case three years ago. Second, the monetary
expansion that fuelled a surge in financial investments in commodities is ending,
which will remove a major upward pressure on fuel prices. Nonetheless, volatility
in the fuel prices remains one of the industry’s major challenges.

Demand: Despite high energy prices, world trade and corporate earnings continued to
improve.  As a result, global GDP projections increased by 0.1 percentage points
to 3.2%, which is supporting continued growth in demand for air transport. However,
growth rates for both cargo and passenger markets have been revised downward because
of higher fuel costs. Passenger demand is now expected to grow 4.4% over the year, a full 1.2 percentage
points below the 5.6% previously forecast in March.
Similarly, cargo demand is expected to increase 5.5% and not 6.1% as predicted
earlier.

The number of price-sensitive leisure travelers has fallen 3–4% over the past
five months, as travel costs were forced higher by fuel prices and, in Europe,
by new passenger taxes. Less price-sensitive premium travel demand has been more
robust in the face of rising prices and continues to be driven by growing world
trade and business investment. Premium passenger growth has dipped from the 9% of 2010, but is expected to be
close to the historical trend this year at a 5–6% rate.

Capacity: Overall capacity (combined passenger and cargo) is expected to expand 5.8%,
which is above the 4.7% anticipated increase in demand. The gap between capacity
and demand growth has widened to 1.1 percentage points from 0.3 percentage points
in the previous forecast. Due to schedule commitments and fixed costs, capacity
adjustments are expected to continue lagging behind the fall in demand, driving
load factors down. By April, passenger load factors were hovering around 77%.
This is more than a full percentage point below the 78.4% achieved for international
traffic in 2010. Aircraft utilization is also falling. This decline in asset utilization,
represented by lower load factors and average hours flown per aircraft, is the
most significant downward pressure on airline profitability.

Yields: Robust economic conditions have given airlines some scope to partially recover
higher fuel prices. This is reflected in an increased yield growth forecast of
3% for passenger traffic (double the previously forecast 1.5%) and 4% for cargo
(up from the previously forecast 1.9%). The problem is that higher travel costs
are now weakening price-sensitive demand and airlines are not expected to be able
to offset higher costs with increased revenues.

Risks: The key risk to this outlook is a weakening of global economic growth. High
energy prices will certainly have a slowing impact on economic growth. However,
the impact will be mitigated by two factors. First, while high oil prices previously
triggered recessions, today’s economies (which generate a unit of GDP using just
half the energy required in the mid-1970s) are less sensitive. Second, the corporate
sector is cash-rich, business confidence is high, and world trade continues to
expand at around 9% annually. The International Monetary Fund and others have
raised global growth projections, which would indicate a recovery in demand growth
to the historical 5.6% level for the second half of 2011. IATA’s forecast for
continued, albeit lower, airline profits despite $110 a barrel oil prices, is
dependant on a strong economy to generate sufficient revenues to partially offset
higher fuel costs.

Regional Highlights

Asia-Pacific carriers are expected to earn $2.1 billion—the most profitable of all regions. Even so,
this is dramatically down from the $10 billion profit that the region achieved
in 2010. Airlines in this region are more exposed than others to cargo markets
and fuel price fluctuations. Asia-Pacific airlines carry 40% of all air freight
volumes, while low labor costs and relatively low hedging means fuel accounts
for a bigger proportion of total costs. In addition, the Japanese earthquake and
tsunami are expected to dent the region’s prospects for the remainder of the year.
However, this will be more than offset by robust growth in both China and India.
The continued dynamism of these economies means that Asia-Pacific is the only
region where demand increases (6.4%) are expected to outpace capacity growth (5.9%).

North American carriers will see the $4.1 billion profit of 2010 fall to $1.2 billion. The region’s carriers
are being hit on the cost side by rising fuel prices, exacerbated by an older,
less fuel-efficient aircraft fleet. The region is also taking a hit on the demand
side with 12% of international revenues linked to the Japan market. This is being
offset somewhat by a stronger than expected US economy and stronger inbound demand
and exports fueled by the weak US dollar. Careful capacity management is expected
to see an overall demand increase of 4% balanced by an equal increase in capacity.

European carriers will deliver a $500 million profit, down from $1.9 billion in 2010. The sovereign
debt crisis is dampening demand from the peripheral European economies. Core economies
are benefiting from strong exports, but new and increased taxation of passengers
is damaging price-sensitive demand. Much of the profit forecast for this year
is expected to be generated on more buoyant long-haul markets. A capacity increase
of 4.8% is expected to outstrip demand growth of 3.9%.

Middle East carriers will deliver a $100 million profit, down from $900 million in 2010. Political
unrest in parts of the region is hurting demand. The major airlines in the region
are expected to continue to win market share on long-haul markets, flying passengers
via Middle Eastern hubs.  However, high fuel costs will weaken demand from key
passenger segments and asset utilization will be under downward pressure. Capacity
growth of 15.5% is expected to outstrip demand expansion of 14.6%.

Latin American carriers will be the only region to deliver a third consecutive year of profits. The regional
economies continue to show good growth, and trade links with the United States
and Asia in particular are boosting traffic. Innovative business models and consolidation
have combined to generate reasonable profits from these growing markets. But a
$100 million profit is down considerably on the $900 million profit of 2010. Capacity
growth of 6.9% will outstrip the 6% increase growth in demand.

African carriers are forecast to be the only region to post a loss, $100 million, in 2011. Political
unrest across Northern Africa is dampening demand, particularly in Egypt and Tunisia,
which have proportionately large tourism industries. Economies and air transport
demand in many African countries have grown strongly but the local industry has
struggled to turn this into profitable growth, hampered by poor infrastructure
and restrictive government regulation. To compound the problem, capacity growth
of 7.4% will outstrip demand growth of 6.5%.

For more information, please contact:

Director Corporate Communications

AGM Media Center Tel: +65 6688 2734

Email:
corpcomms@iata.org

http://www.iata.org/pressroom/pr/Pages/2011-06-06-01.aspx