Trade Group President Says Airlines Are 'Competing In A Very Tough Environment'

The International Air Transport Association (IATA) announced an upgrading of its industry profit expectations to $6.9 billion (up from $4.0 billion projected in June). IATA 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%. “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 (pictured). “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%. 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% in 2011 falling to 2.4% in 2012. Airline financial performance is closely linked to the health of world economies. Whenever GDP growth has slowed below 2.0% 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.
 
According to IATA, passenger demand has been stronger than anticipated given the gloomy economic outlook. The forecast for the year stands at 5.9% growth (up from 4.4% projected in June). In the year to July, passenger volumes were up over 6% 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. 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.

Air freight has stagnated since the start of the year. IATA slashed its full-year volume growth projection from 5.5% to 1.4%. Airlines are expected to carry 46.4 million tonnes of cargo in 2011 (down from the previous forecast of 48.2 million). Air freight volumes reached their post-recession peak in May 2010, largely driven by re-stocking.  July’s traffic was 4% lower than that level. It appears unlikely that a revival in air freight will begin before 2012.
 
Airlines managed to restore passenger load factors back to the 2010 highs. By July the global passenger load factor stood at 83.1%. 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% by July.
 
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%. 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).

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).

Oil prices have remained consistent with the previous forecast of $110/barrel (Brent Crude). This is 39% higher than the $79.4 average price of 2010. A total fuel bill of $176 billion is expected to account for 30% of industry costs.
 
The overall industry outlook grows weaker in 2012. 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.
 
The industry forecast of a $4.9 billion profit is based on:

• Passenger markets that will grow by 4.6% (slower than the 5.9% projected for 2011), but with yield growth falling to 1.7% (about half the 3.0% growth expected in 2011).
• Cargo markets that will grow at 4.2% (three times the 1.4% growth of 2011), but with no growth in yields.
• Fuel prices are expected to fall slightly based on a crude oil price of $100 per barrel (less than the $110 price expected for 2011). But due to the effects of fuel hedging delaying the benefits of lower spot prices, the fuel bill will grow to 32% of airline costs (up from 30% in 2011) with a total bill of $201 billion.

“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," Tyler said. "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."

FMI: www.iata.org