Singapore – 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. “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
Middle East carriers are expected to make $800 million, up from the $100 million projected in June. Holding up against potential demand shocks associated with political instability, the region’s carriers grew passenger traffic 8.3% compared to a capacity increase of 9.0% in the first seven months of this year. An EBIT margin of 3.0% is projected.
Looking at 2012.
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. 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,” said Tyler.
“As governments seek to re-start troubled economies, a strategic approach to aviation policy would deliver broad economic benefits. Every plane that takes off is a catalyst for economic growth and prosperity. Governments must carefully evaluate the negative impact of the current high levels of taxation, absolutely resist increases or new taxes, and develop policies that support aviation’s growth with efficient infrastructure. Time and again aviation has shown its resilience. People need and want to travel. Now is the time to harness the economic possibilities that this presents,” said Tyler.
The outlook for the industry based on IATA’s financial forecast to 2012.
