The International Air Transport Association (IATA) is predicting a second year of declining profits since airline returns peaked in 2010 at $15.8bn.

 

In 2011, industry profits fell to $7.9bn – equivalent to a 1.3% net profit margin, while this year’s projected $3bn industry profit is expected to yield a net profit margin of just 0.5%.

 

In 2012, global industry profits are expected to reach $3bn, with IATA saying this prediction is unchanged from the last update in March. It adds that a fall in oil prices, stronger than expected growth in passenger traffic and a bottoming out of the freight market are driving some improvements in the profitability outlook.

 

However, this is offset by the continued and deepening European sovereign debt crisis, which has led markets to expect a further deterioration and damage to economic growth, the adverse impact of which has been built into this forecast.

In a statement today, IATA said: “Compared with the previous forecast in March, North American and Latin American carriers are expected to see improved prospects. The outlook for African carriers is unchanged. But the outlook for European, Asia-Pacific and Middle Eastern carriers has been downgraded, with European losses now expected to be $1.1bn (nearly double the previously forecast $600m loss).”

 

Commenting on the change, Tony Tyler, IATA’s Director General and CEO (left) said: “The $3bn industry profit forecast has not changed. But almost everything in the equation has. Demand has been better than expected so far this year. And fuel prices are now lower than previously anticipated, but that’s on the expectation of economic weakness ahead. The Eurozone crisis is standing in the way of improved profitability and we continue to face the prospect of a net profit margin of just 0.5%.

 

“Although airlines face the common challenges of high fuel prices and economic uncertainty, the regional picture is diverse. Carriers in the Americas are seeing improved prospects for 2012. The rest of the world is seeing reduced profitability. For European carriers, the business environment is deteriorating rapidly resulting in sizable losses,” he said.

 

As the Eurozone crisis deepens, IATA says that the revised forecast is based on a weaker European economic environment than previously forecast in March. It adds that in this central forecast it is assuming that the worsening of the Eurozone situation is limited and does not deteriorate into a widespread banking crisis; the US economy continues to recover, but at a mediocre pace; and Chinese economic growth slows, but a hard landing is avoided by policy stimulus.

 

IATA added: “World GDP growth, a key driver of airline profitability, is expected to be 2.1% in 2012. That is slightly better than the anticipated 2.0% growth forecast in March. But this is still a slower growth environment than last year, and one in which airlines will struggle to recover cost increases. Historically, the airline industry has fallen into losses (at a global level) when world GDP growth drops below 2.0%.

 

“Oil prices have slipped below $100/barrel (Brent), as the Eurozone crisis generated fears of recession, having been above $120/barrel earlier this year. The forecast uses the latest consensus estimate for Brent, which has been revised down to $110/barrel (from the $115/barrel used in our March outlook). Even with this price softening, fuel is still expected to account for 33% of airline operating costs, the same as in 2008 when oil prices spiked. 

“Traffic: Given the actual slower economic growth environment it has been notable that up to April passenger demand, measured in revenue passenger kilometers, continued to expand at an above-trend rate of 6.0%. The strongest markets have been those linked with Asia, Latin America, and the Middle East, where economies have been more robust.

 

“However, a weaker second half of the year is expected as deepening problems in Europe damage confidence. Even so, the strength of travel demand in the first part of this year has caused an upward revision to the forecast for air travel growth to 4.8% from 4.2% in the previous forecast. Passenger numbers are expected to reach 2.966bn this year, up from 2.835bn in 2011.”

 

Keeping revenues ahead of costs will be the constant challenge in the airline industry, says IATA: “In 2012, operating revenues are expected to reach $631bn, while operating costs will grow to $623bn. The resulting operating profit or EBIT of $8.6bn reflects the narrowness of the gap between revenues and costs. It doesn’t take much to eliminate the 1.4% operating profit margin.

 

“Moreover, these earnings are just sufficient to pay for debt interest, taxes, and other financial transactions. We forecast this will leave airline shareholders with a net profit of just $3bn in 2012.

 

THE OUTLOOK BY REGION:

 

Looking at the outlook by regions, IATA says that North American carriers are expected to post a profit of $1.4bn. That is up from the March projection of $0.9bn and a slight improvement on the $1.3bn that the region’s carriers made in 2011. The main driver of this performance is a significant improvement in yields on the back of tight capacity management. Capacity growth for North American carriers is basically flat (0.1%), against demand growth of 0.5% (which, notably, is the slowest among all regions).

 

“European carriers are expected to post the industry’s largest aggregate losses of $1.1bn as the Eurozone crisis continues. This is a $0.5bn downgrade from the March forecast. Demand growth is expected to slow to 2.3%, which is significantly down on the 6.7% expansion of 2011. Some major European economies are already in recession (Spain and the United Kingdom) and it is anticipated that economic weakness will spread further during the course of the year as the Eurozone crisis deepens.

 

“Concurrently, European carriers continue to be hit by high and rising tax regimes, inefficiencies in air traffic management, and the high cost of complying with poorly thought-out regulations.

 

“Asia-Pacific carriers are expected to make the largest contribution to industry profits ($2bn), even with a $0.3bn downgrade from the previous outlook, due to the weak first quarter performance. This is less than half the $4.9bn profit that the region delivered in 2011 and a quarter of the $8bn achieved in 2010. Asian carriers make up about 40% of the global air cargo business and the weakness of this market in 2011 was the reason why there was a large decline in the region’s profits.

 

“There has been little sign of the region’s airlines benefiting from the modest upturn in cargo markets this year. The slowdown in the Chinese and Indian economies is another factor in the slow growth environment. Nevertheless, the region will benefit from stronger growth in aggregate passenger and cargo traffic this year, as a result of the rebound in demand in the Japan market following the tsunami and earthquake last year.

“Regional demand is expected to grow at 3.9%, above the anticipated 3.3% growth in capacity, providing some protection to airline profits.

 

“The Middle East carriers are expected to post profits of $0.4bn, down from the March projection of $0.5bn. This is a significant drop compared with 2011, when the region’s carriers returned a profit of $1bn. The weakness of European originating traffic will damage long-haul markets, but Middle East airlines continue to lead the industry on growth.

 

“Along with capturing long-haul passenger traffic through the Gulf hubs, they have been the beneficiary of 80% of the improvement in cargo markets during the past six months. Overall, capacity by the region’s carriers is expected to expand by 13.3%, behind the 14.1% growth in demand.

 

“Latin American carriers are expected to post profits of $0.4bn. This is a $0.3 bn improvement compared with the March projections. Like their counterparts in North America, Latin America-based airlines are forecast to show a modest improvement on 2011 performance ($0.3bn). The main driver is a turnaround in the previously loss-making Brazilian market, as capacity growth is reduced and yields improve.

 

“The outlook for African carriers is unchanged with an expected loss of $0.1bn. This is a downgrade on the break-even performance in 2011. Weakness in originating traffic from the key European market is expected to adversely affect international passenger markets in the region. Moreover, load factors are already low and capacity is expected to grow 5.2% this year, ahead of demand growth of 4.2%. The region’s carriers continue to face stiff competition on long-haul routes.”