The International Air Transport Association (IATA) announced an upward revision to its global aviation outlook for 2012. According to IATA, the fall in airline profits from the $8.4 billion that the industry earned in 2011 will be cushioned by improved airline performance.
Airlines are expected to earn $4.1 billion in 2012 (up $1.1 billion from the $3.0 billion forecast in June). The revision will still see the industry’s net profit margins fall from the 1.4% realized in 2011 to 0.6% (up from the previously forecast 0.5%).
In a first look at 2013, the association sees global profits rising modestly to $7.5 billion, though this is a net margin of just 1.1%.
SOVEREIGN DEBT CRISIS
“The European sovereign debt crisis lingers on. China continues to moderate its growth,” says Tony Tyler, IATA’s Director General and CEO [pictured left].
“And the impact of recent quantitative easing in Japan and the US will take time to yield growth. While some of these risks have diminished slightly over recent months, they continue to take their toll on business confidence.
“The outlook improvement is due to airlines performing better in a difficult environment.”
Improved airline performance was evident in second quarter results, which showed operating profits close to those of the previous year, following a tough first quarter. The evidence is showing that consolidation is producing positive results.
PROFITABILITY ON A KNIFE-EDGE
In the current cycle airlines have kept both load factors and aircraft utilisation high. This has allowed yields to improve and spread fixed costs more widely.
“Even six years ago, generating a profit with oil at $110/barrel (Brent) would have been unthinkable. The industry has re-shaped itself to cope by investing in new fleets, adopting more efficient processes, carefully managing capacity and consolidating,” adds Tyler.
“But despite these efforts, the industry’s profitability still balances on a knife-edge, with profit margins that do not cover the cost of capital.
“Aviation has an important role to play as the global economy struggles. Growth is the only way forward and a healthy aviation industry can stimulate that—linking stagnating developed economies to robust emerging markets.
CATALYST FOR GROWTH
“Aviation connectivity spurs growth at both ends. That is why it is important for governments to ensure aviation’s ability to be a catalyst for growth is not constrained. Unfortunately, in many parts of the world, it is an uphill struggle with high taxes, onerous regulation and insufficient infrastructure. All of this stunts industry growth to the detriment of the world economy,” said Tyler.
Globally, aviation supports some 57 million jobs and $2.2 trillion in economic activity. GDP forecasts have remained unchanged at 2.1% growth for 2012.
The passenger market has performed well in the face of weak business confidence in Western economies. Demand is expected to grow by 5.3% over the course of 2012, which is 0.5 percentage points better than was foreseen in June.
Over the first eight months of 2012 passenger demand has increased by 1.4 percentage points ahead of capacity. These tighter supply and demand conditions led to strong load factors, which averaged at 79.3% for January to August 2012. This set the stage for a stronger yield growth, which is expected to be 2.5% (one percentage point ahead of what was anticipated in June).
European airlines are expected to post the largest loss of any region at $1.2 billion ($0.1 billion worse than previously forecast). European carriers have seen moderate traffic growth but an indication of the difficult trading conditions can be seen in the premium travel market.
In July, the important North Atlantic premium travel market was 2.4% below previous year levels and premium travel within Europe was down 3.5%. IATA says that the region is plagued by high taxes, inefficient air traffic management infrastructure and an onerous regulatory environment.
North American carriers are expected to post profits of $1.9 billion in 2012, up $0.5 billion from the previous forecast and from the $1.3 billion that the region made in 2011. This is the largest improvement among all the regions.
Over the first eight months of the year, passenger demand grew by 1.3% while capacity expanded by just 0.2%. As a result, the region has also maintained consistently high load factors—averaging 83.2% for the January to August period.
Asia-Pacific airlines are set to post a $2.3 billion profit for the year. That is $0.3 billion better than previously forecast. With 40% of the global cargo market, the region’s carriers are the most exposed to weak cargo demand.
China continues to have the fastest growing major domestic market, experiencing 9.4% growth over the first eight months of the year.
Middle East carriers are expected to post a $0.7 billion profit, up $0.3 billion from the previous forecast. Although global cargo markets have been basically flat since the end of last year, the region’s carriers have captured the majority of what growth there has been.
Over the first eight months of the year, the region’s cargo capacity has expanded by 13% while demand has increased by 14%. The region has also shown the strongest passenger traffic growth with a 17.1% increase in demand outstripping a 13.2% increase in capacity. The region’s carriers continue to expand their long-haul market share with connections through their expanding hubs.
Latin American airlines are expected to post a profit of $0.4 billion—similar to the previous forecast and an improvement on the $0.3 billion that the region made in 2011. North America and Latin America are the only regions with an expected improvement in profitability over 2011. The region continues to show robust growth in traffic, reflecting demand generated by strong trade flows from the region, but also robust growth in economies such as Mexico and Chile.
Capacity cuts have stemmed airline losses on Brazil’s domestic market, bringing supply and demand into better balance. On international markets consolidation is also becoming evident in transactions such as the LATAM merger.
African airlines are expected to break even in 2012. This is an improvement from the $0.1 billion loss that was previously forecast. The region’s carriers have benefitted from the strong growth of many African economies, boosted in some cases by investment and trade links with China and for some by strong oil revenues.
However, within the region airline performance continues to be very mixed. On average load factors are the lowest in the world as many of the region’s airlines struggle to match capacity with demand.
OUTLOOK FOR 2013
In its first look at 2013, IATA estimates industry profits rising to $7.5 billion, as economic forecasts point to slightly stronger economic growth and lower oil prices.
That’s a better result than 2012 but with a profit margin of only 1.1% of revenues it still represents a return on capital far below other industries.
The modest improvement is based on a forecast for global GDP of 2.5% growth (up from 2.1% in 2012). This will help fuel passenger traffic expansion of 4.5% and cargo expansion of 2.4%.
Passenger yields are expected to remain flat. Meanwhile, revenues are expected to grow by $24 billion to $660 billion. While this will be a slower growth than the $39 billion expansion that is anticipated from 2011 to 2012, it is expected to lead to improved profitability owing to stable costs—particularly fuel.
European airlines are expected to be the only region in the red for 2013, although losses will be trimmed as a result of slower capacity growth and improved global trading conditions on long-haul markets.