IATA has downgraded its industry outlook for 2012, mainly due to oil prices.
The airline industry is expected to turn a global profit of $3 billion in 2012 for a 0.5 per cent margin, according to IATA
. This is a $500 million downgrade from the December forecast, driven by a rise in the expected average price of oil, which has reached $115 per barrel. This is an increase from the previous forecast of $99 per barrel. The increase means that fuel will take up 34 per cent of average operating costs, with an increased industry fuel bill expected to rise to $213 billion.
Furthermore, overall capacity for both passenger and cargo is expected to grow by 3.2 per cent in 2012, below the previously forecast 3.6 per cent of expected expansion in demand.
However, on a positive note, a more significant downgrade was avoided, due to a number of factors. These include the avoidance of the worsening of the Eurozone crisis, an improvement in the US economy, cargo market stabilisation, and slower than expected capacity expansion.
Director general, IATA, Tony Tyler
said: “2012 continues to be a challenging year for airlines. The risk of a worsening Eurozone crisis has been replaced by an equally toxic risk – rising oil prices. Already the damage is being felt with a downgrade in industry profits to $3.0 billion.”
Global GDP growth and airline performance are closely tied; that is to say when GDP growth drops below 2.0 per cent, the global airline industry returns a collective loss.
“With GDP growth projections now at 2.0 per cent and an anaemic margin of 0.5 per cent, it will not take much of a shock to push the industry into the red for 2012,” said Tyler.
IATA’s estimated profits were revised upwards for 2011 to $7.9 billion from a previous forecast of $6.9 billion, primarily due to better than expected performance from the Chinese carriers.
IATA expects European carriers to be the worst hit amongst the regions, with an estimated $600 million net loss and an EBIT margin of 0.3 per cent of revenues. The fact that many European economies are in deep recession does not help the situation, although it appears that a significant worsening of the Eurozone crisis has been averted. As a result, this might have a negative impact on both cargo and passenger business, and the airline industry is being hit by taxation and the cost of the EU ETS.
Profits of $900 million are expected for North American carriers, down from $1.7 billion. The 2.0 per cent EBIT margin shares top position with Asia-Pacific carriers. Higher fuel costs are responsible for the downgrade, but airlines in this region will see the smallest deterioration from last year’s performance among the major regions, as a result of the very small increases in capacity expected.
There is a continued positive performance from Asia Pacific carriers, especially the Chinese who saw an upward revision of 2011 profits to $4.8 billion from a previous $3.3 billion estimate. The region’s airlines are expected to deliver a profit of $2.3 billion in 2012, a $200 million increase from the estimate made in December. Higher fuel costs will more than halve profits this year but the region’s relatively strong economies will continue to generate more rapid growth in travel and cargo than the other large regions.
In relation to the Middle East region, IATA expects to see profits of $500 million, an increase from the previously forecast $300 million. Financial performance was already seen to be better than previously expected in 2011, with an upgrade from $400 million to $1 billion. In the passenger business, load factors have improved by a slowdown in the introduction of new capacity, and long haul markets have been relatively robust.
Latin American profits are unchanged from the previous forecast of $100 million. IATA reports that performance is mixed across the region, but the region’s airlines might find more of a challenge to recover the increase in fuel costs they face this year due to intense competition and slowing economies in some markets.
African carriers are still expected to see losses of $100 million, unchanged from the previous forecast. Some of the region’s economies are growing strongly and generating expanding demand for air transport. However, passenger and freight load factors are very low on average for airlines in this region, which will make it difficult to recover the rise in fuel costs.
“Airlines are buffeted by many forces beyond their control. Today’s forecast demonstrates just how quickly the operating environment can change. Four months ago the biggest worry was a European financial disaster; today it is rapidly rising oil prices. Nimbleness and operating efficiency are critical to maintaining competitiveness and managing through such dramatic shifts,” said Tyler.
“A sustainable airline industry could deliver much more to the global economy. But the unintended consequences of many government policies have contributed to keeping the industry on a knife-edge between profit and loss. Short-sighted excessive tax collection in many markets undercuts aviation’s ability to provide access to the connectivity that drives global business. Regulation implemented without a clear cost-benefit analysis often scores political points at the expense of industry efficiency let alone solving the problems it was intended to address. Failure to drive forward important infrastructure modernisation projects such as NextGen and Single European Sky, limit the effectiveness of the billions of dollars that airlines are investing in more efficient and capable aircraft,” said Tyler.
“Today’s industry situation reinforces the need for governments to take a more strategic approach to aviation with competitiveness-enabling policies that will deliver broad economic benefits. This has been tried, tested and proven by many governments in Asia and the Middle East. And Europe, India, the US and others should take note,” said Tyler.