European Passenger Taxes Could Spur $600 Million In Losses In
The Region
In the revised industry outlook released Wednesday by the
International Air Transport Association (IATA), 2011 profitability
remains weak but unchanged at $6.9 billion for a net margin of
1.2%. And looking ahead to 2012, IATA downgraded its central
forecast for airline profits from $4.9 billion to $3.5 billion for
a net margin of 0.6%.
The Eurozone crisis puts severe downside risk on the 2012
outlook as illustrated by the recently published OECD economic
outlook. In a worst case scenario, should the Eurozone crisis
evolve into a full-blown banking crises and European recession,
IATA estimates that the global aviation industry could suffer
losses exceeding $8 billion in 2012.
“The biggest risk facing airline profitability over the
next year is the economic turmoil that would result from a failure
of governments to resolve the Eurozone sovereign debt crisis. Such
an outcome could lead to losses of over $8 billion—the
largest since the 2008 financial crisis,” said Tony Tyler,
IATA’s Director General and CEO. “The global forecast
for 2011 is unchanged at $6.9 billion. But regional differences
have widened, reflecting the very different economic environments
facing airlines in different parts of the world. And the overall
margin of 1.2% tells you just how difficult the battle for
profitability in this business is,” he said.
European carriers are by far in the most challenging position.
Higher passenger taxes and weak home market economies have limited
profitability in Europe. The region’s carriers are forecast
to generate a collective profit of just $1.0 billion, down from the
previously forecast $1.4 billion, and an EBIT margin of 1.2%. Low
profitability has been despite European airlines being one of the
fastest growing regions in terms of traffic this year. Yields have
suffered and the base of strong demand grows more fragile as the
sovereign debt crisis escalates.
North American carriers are in a much more benign environment.
They have seen yield and load factor improvements as a result of
tight capacity management, which has improved profitability to $2.0
billion (up from the previously forecast $1.5 billion). The US
economy has also grown at a faster pace than Europe. This gives the
region the strongest EBIT margin of 3.2%. None-the-less, the
bankruptcy filing of American Airlines indicates that the region
faces intense competitive challenges as well.
Asia-Pacific carriers also saw stronger though varied trading
conditions. Japan’s domestic market still has not fully
recovered from the March earthquake and tsunami, and load factors
remain under pressure. By contrast airlines have improved load
factors and profitability on China’s expanding domestic
market. We have upgraded our forecast for the region by $800
million to a $3.3 billion profit. This is the largest absolute
profit among the regions.
Middle East carriers are expected to see profits of $400 million
(down from the previously forecast $800 million) as high fuel costs
squeezed profit margins on the more price sensitive long-haul
traffic connecting over Middle Eastern hubs.
In a similar pattern Latin American profits will see a downgrade
to $200 million (from the previously forecast $600 million).
Performance has been mixed across the region with much of the
downgrade due to the impact of intense competition and falling load
factors on Brazil’s domestic market.
African carriers are still expected to break-even. New trade lanes
with Asia are developing and markets within the continent are
reflecting the improvement in economic development in many African
economies. However, competition has been fierce and the
region’s airlines have struggled to keep load factors at
profitable levels.
At the global level, passenger demand is expected to expand by 6.1%
which is stronger than the 5.9% forecast in September. Air travel
growth has persisted at a stronger pace than we had expected. This
travel strength, along with tight capacity management, particularly
in North America, has kept load factors high and is supporting a
4.0% increase in yields. This has helped a modest increase in
forecast revenues, which we expect to total $596 billion this
year.
This slightly stronger-than-expected passenger performance is
offsetting (1) worse-than-expected cargo performance and (2)
somewhat higher-than-anticipated oil prices. At an average oil
price of $112 per barrel, the industry’s 2011 fuel bill is
expected to be $178 billion (up $2 billion from previous
expectations). A downward trend in cargo since mid-year means that
cargo likely will finish the year with a 0.5% contraction in
volumes and flat yields.
Even if government intervention averts a banking crisis it is
unlikely that Europe will avoid a brief recession. Business and
consumer confidence has already fallen too far. Global GDP growth
forecasts for 2012 have been revised downwards to 2.1%.
Historically the airline industry has seen profit turn into loss
whenever global GDP growth falls below 2%. This is driving the
downgrade in the 2012 outlook.
Key variables driving this downgrade:
- Demand: Passenger demand is expected to grow by 4.0% (down from
previously forecast 4.6%), while cargo is expected to show flat
growth (down from the previously forecast 4.2% expansion).
- Yields: Passenger and cargo yields are expected to remain flat
in 2012. While this is unchanged for cargo, passenger yields were
previously forecast to grow by 1.7%.
- Fuel: Fuel costs are relatively unchanged from the previous
forecast at $198 billion. That is based on oil at $99 per barrel
(against a previous forecast of $100 per barrel).
- Revenues and Costs: Industry revenues are expected to grow by
3.7% to $618 billion. This will be outstripped by cost increases of
4.5% to $609 billion.
All regions are expected to show profit deterioration from 2011.
However, the regional differences in 2012 are stark:
- European carriers are expected to fall into losses of $600
million, hit by the weakness of their home market economies and
further increases in passenger taxes.
- North American carriers are expected to generate profits of
$1.7 billion, maintaining the strongest EBIT margin of 2.4%, as
limited capacity growth is providing some protection against the
downward pressure on profits.
- Asia-Pacific carriers are expected to deliver the largest
absolute profit at $2.1 billion. This is weaker than 2011’s
performance but the deterioration is limited by high load factors
on markets such as China, where the increases in demand are
structural and to some extent shielded from the cycle.
- Middle East carriers are expected to post a $300 million
profit, less than half the previously forecast $700 million profit,
as long-haul market conditions deteriorate, in particular those
linked to the weak European economies.
- Latin American carriers will see profits decline to $100
million—a $400 million negative swing from the previous
forecast, partly a carry-over from the recent weakness of
profitability in the large Brazil market.
- African carriers will fall into losses of $100 million,
unchanged from the previous forecast. Economies and air
transport markets continue to grow in the region, but load factors
are not expected to be strong enough to offset the impact of weaker
yields on profitability.
“Even our best case scenario for 2012 is for a net margin
of just 0.6% on revenues of $618 billion. But the industry is
really moving at two speeds with highly taxed European carriers
headed into the red,” Tyler said.
The OECD’s last economic outlook carried a risk assessment on
the European sovereign debt crisis, which caused IATA to develop a
second scenario for 2012 taking into account the possibility of the
Eurozone crisis deteriorating into a renewed banking crisis. Based
on the OECD’s view that this scenario would cut global GDP
growth to 0.8%, IATA estimates that this has the potential to cause
global industry losses of $8.3 billion.
In this scenario, all regions would fall into losses. Europe would
be expected to post the deepest losses at $4.4 billion, followed by
North America at $1.8 billion and Asia-Pacific at $1.1 billion. The
Middle East and Latin America would both be expected to post $400
million losses, while Africa would be $200 million in the red.
Tyler said, “This admittedly worst-case—but by no
means unimaginable—scenario should serve as a wake-up call to
governments around the world. In a good year, the airline industry
does not cover its cost of capital, much less in a bad one. But in
a bad year, aviation’s ability to deliver connectivity and
keep the heart of the global economy pumping becomes even more
vital to initiating a recovery. Government policies need to
recognize aviation’s vital contribution to the health of the
economy.”
This scenario is based on global GDP growth falling to 0.8% in 2012
driven by Europe descending into deep recession. Historically, GDP
growth rates below 2.0% have resulted in the airline industry
producing a net global loss. In this scenario, airlines would see
growth in passenger demand grind to a halt and a 4.7% contraction
in cargo markets. Both passenger and cargo yields would fall by
1.5%.
Some relief in the fuel price would be expected. Based on oil at
$85 per barrel, the fuel bill would be $183 billion and consume 31%
of costs. However, overall expenses would be expected to grow by
1.9% (compared to 2011) to $592 billion. Revenues would see a fall
of 1.3% (compared to 2011) to $589 billion. The net result would be
an $8.3 billion loss and net margin of minus 1.4%.