The International Air Transport Association (IATA) today downgraded its airline industryearnings outlook for 2011 as rising oil prices look set to cut airline profits by almost 50%
compared to last year. But it upgraded cargo forecasts for this year.Airlines are now expected to earn $8.6 billion this year, IATA said in its latest financialforecast. This is well down on the $9.1 billion estimate for 2011 that was made in December 2010before the recent surge in oil prices. The new forecast for industry profits is a 46% fall in netprofits compared to the $16 billion (revised from $15.1 billion) earned by the industry in2010. On expected industry revenues of $594 billion, the $8.6 billion 2011 profit equates toa net profit margin of 1.4%, the association said.
“Political unrest in the Middle East has sent oil over $100 per barrel. That is significantlyhigher than the $84 per barrel that was the assumption in December. At the same time the globaleconomy is now forecast to grow by 3.1% this year, a full 0.5 percentage point better thanpredicted just three months ago. But stronger revenues will provide only a partial offset to highercosts. Profits will be cut in half compared to last year and margins are a pathetic 1.4%,” declaredGiovanni Bisignani, IATA’s Director General and CEO.
For fuel, IATA has raised its 2011 average oil price assumption to $96 per barrel of Brent crude(up from $84 in December), in line with market forecasts. Including the impact of fuel hedging,which is roughly 50% of expected consumption, this will increase the industry fuel bill by $10billion to a total of $166 billion. Compared to levels in 2010, oil prices are now expected to be20% higher in 2011. Fuel is now estimated to represent 29% of total operating costs (up from26% in 2010). With oil prices now being driven by speculation on geopolitical events in the MiddleEast rather than strengthening economic growth, this is a significant downside risk.
Growing economies give airlines the opportunity to recover some of these added costs withadditional revenues. For example, since early 2009, rising oil prices added 25% to unit costs whileaverage fares (excluding surcharges) rose 20%. But in 2011 higher revenues are not expectedto be sufficient to prevent the rise in oil prices from causing profits to shrink by 46% from 2010levels.
More positively, demand looks better for 2011, IATA said. An increase in global GDP forecasts to3.1% (from 2.6% in December) bodes well for continuing strong demand for air transport and IATA hasrevised its cargo growth forecast to 6.1% (up from 5.5%). Moreover, freight load factors are alsohigh compared to previous cyclical peaks. These tightening supply and demand conditions givescope for yield improvements. Cargo yields are now expected to rise 1.9% this (up from the previousforecast of no growth).
“This year the industry is performing a balancing act on a very thin tight-rope of a 1.4%margin. It is a structural problem that the industry has faced with an average margin of just 0.1%over the last four decades. There is very little buffer for the industry to keep its balance as itabsorbs shocks. Today oil is the biggest risk. If its rise stalls the global economic expansion,the outlook will deteriorate very quickly,” said Bisignani.
In regional terms, Asia-Pacific carriers are expected to deliver the largest collective profitof $3.7 billion and the highest operating margins of 4.6%. This is down substantially from the $7.6billion that the region’s carriers made in 2010 and from the previously forecast $4.6 billion for2011. While the strong economic growth in the region is still driving profitability, inflationfighting measures in China are slowing trade and air cargo demand. The key reason for thedowngrade from December’s forecast is that the region is more exposed to higher fuel prices, due torelatively low hedging on average.
North American carriers are expected to deliver $3.2 billion profit, unchanged from the previousforecast and down from the $4.7 billion profit made in 2010. Higher oil prices will damageprofitability in 2011, but earlier cuts in capacity have led to much stronger conditions for yieldsthan elsewhere. The US economy has also been stronger than expected. Compared to theDecember forecast, better revenues in 2011 will offset higher fuel costs.
European carriers are expected to make a $500 million profit. This is up from the $100 millionpreviously forecast, but well below the $1.4 billion that the region’s carriers made in 2010. It is the carry-over from better than expected 2010 second-half performance that has led toforecast revisions. The ongoing banking and government debt crisis are keeping domestic homemarkets fragile. But the weak Euro is continuing to provide stimulus to export industries, outboundfreight and long-haul business travel which is driving the upgrading of the region’s profitforecast. Even so, Europe’s carriers remain the least profitable among the major regions with anEBIT margin of 1.1%.
Middle East carriers are expected to return a profit of $700 million. This is considerablybetter than the $400 million previously forecast, but down from the $1.1 billion profit that theregion posted in 2010. Political instability in the region is expected to take its toll in Egypt,Tunisia and Libya which combined account for about 20% of the region’s international passengertraffic. This is balanced by the Gulf area which benefits from economic activity related to highoil prices and whose hubs continue to win long-haul market share. Load factors have alsoimproved significantly for these airlines, as new capacity is being added at a slower pace thandemand increases.
Latin American carriers are forecast to post a $300 million profit. This is down sharply fromthe $1 billion that the region made in 2010 and from the previously forecast $700 million. Strongeconomic growth and international trade in the region are driving travel and cargo demand and theregion’s profits for airlines. Exposure to higher oil prices is the key reason for the expecteddeterioration in the region’s profitability this year.
African carriers are expected to break even. This is unchanged from the previous forecast butdown from the $100 million profit that the region posted in 2010. Strong economic and transportdemand growth on the back of foreign direct investment and rapidly growing trade links with Asia iskeeping the region’s carriers out of the red. However, they face intensifying competition fromMiddle Eastern carriers and others for lucrative business traffic.
