Aviation Industry: A reduction in profit due to rising oil prices
The International Air Transport Association (IATA) has announced a downgrade to its industry outlook for 2012 primarily due to rising oil prices.
IATA now expects airlines to turn a global profit of $3 billion in 2012 for a 0.5 percent margin. This $500 million downgrade from the December forecast is primarily driven by a rise in the expected average price of oil to $115 per barrel, up from the previously forecast $99.
Several factors prevented a more significant downgrade. They include; the avoidance of a significant worsening of the Eurozone crisis; improvement in the US economy; cargo market stabilization; and slower than expected capacity expansion.
"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 The risk of a worsening Eurozone crisis has been replaced by an equally toxic risk - rising oil prices.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 billion," IATA's Director General and CEO Tony Tyler said.
Airline performance is closely tied to global GDP growth. Historically, when GDP growth drops below 2 percent the global airline industry returns a collective loss.
"With GDP growth projections now at 2 percent and an anemic margin of 0.5 percent, it will not take much of a shock to push the industry into the red for 2012," said Tyler.
IATA revised upwards its estimated profits for 2011 to $7.9 billion from the previously forecast $6.9 billion. This was primarily owing to the much better than expected performance of Chinese carriers.