Debt Crisis In EU, Rising Jet Fuel Prices Will Hurt Profits

The influential Frost & Sullivan consulting firm finds some contradictions among recent market forecasts issued by Airbus, Boeing, and IATA, the International Air Transport Association. Diogenis Papiomytis, Frost & Sullivan Principal Consultant, says most western airlines are in need of modernization, even though their respective markets will see little growth over the next few years. He contrasts that to Air Asia's Paris Air Show order for 200 A320s, indicative of an airline clearly geared for growth.

The recent manufacturer forecasts for the next 20 years saw Boeing predict 31,500 new aircraft deliveries, but Airbus only 28,000, a difference of more than 10 percent. Papiomytis observes that Airbus is, however, bullish on the future for the "very large" segment over 400 seats, which just happens to include its A380 superjumbo.

The analyst suggests the biggest takeaway from the Airbus forecast is what he calls "constrained optimism" regarding world economic growth. Papiomytis observes, "Airbus expects a 3-4 per cent world GDP growth in 2012, with a corresponding air
traffic growth of 7 per cent. Once again, so called 'mature economies' are the ones which keep the global airline industry from double digit growth."

IATA does not attempt to forecast airliner deliveries, but rather worldwide airline profits, and its predictions beyond 90 days out have looked wildly unreliable in the past two years. The latest forecast, issued this week, revises full-year global airline net profit estimates from $4.0 to $6.9 billion, based on better results from European carriers.

Papiomytis calls IATA numbers "good indicators of market sentiment, but rather irrelevant from a macro-perspective." He predicts airlines will struggle to break-even next year, facing increasing jet fuel prices and fears of a contagious European economic crisis. In summary, he says, "everything is pointing towards a difficult 2012 for airlines."

FMI: www.frost.com