Cheaper oil promotes airline industry profits
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
Global airline industry profits are expected to be $3 billion, unchanged from the last update in March, the International Air Transport Association (IATA) outlook for 2012 said.
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, it said. This will be the second year of declining returns since airline profits peaked in 2010 at $15.8 billion with a net profit margin of 2.9 percent, the industry association said.
In 2011, industry profits fell to $7.9 billion for a 1.3 percent net profit margin. This year’s projected $3.0 billion industry profit would yield a net profit margin of just 0.5 percent.
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 $1.1 billion (nearly double the previously forecast $600 million loss).
“The $3.0 billion 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 percent,” said Tony Tyler, IATA’s director general and CEO.
“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,” said Tyler.
As the Eurozone crisis deepens, the revised forecast is based on a weaker European economic environment than previously forecast in March. In this central forecast, IATA assumes 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
* Chinese economic growth slows, but a hard landing is avoided by policy stimulus
World GDP growth, a key driver of airline profitability, is expected to be 2.1 percent in 2012. That is slightly better than the anticipated 2.0 percent 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 percent, it said.
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 percent of airline operating costs, the same as in 2008 when oil prices spiked, it said.
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 percent.
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 percent from 4.2 percent in the previous forecast. Passenger numbers are expected to reach 2.966 billion this year, up from 2.835 billion in 2011.
Cargo demand has bottomed out, following a sharp fall in 2011, in line with the moderate improvement of business confidence in a number of economies outside Europe. But the upturn is weak and narrowly based, with only Middle Eastern airlines seeing significant volume gains. European economic weakness is expected to limit any further improvement. Overall 47.8 million tonnes of freight are expected to be shipped by air in 2012, basically unchanged from the 47.7 million tonnes carried in 2011.
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