IATA has released its revised industry outlook
for 2012, that show global industry profits are expected to be
$3.0 billion, unchanged from the last update in March.
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.
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%. In 2011, industry profits fell to
$7.9 billion for a 1.3% net profit margin. This year’s projected
$3.0 billion industry profit would yield a net profit margin of
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
“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%,” 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.”
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 assumed 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
• 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% 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: 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 2.966 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.
Capacity: One of the notable features of this
business cycle has been the limited expansion of capacity by
airlines, and the resulting success in sustaining high levels of
asset utilization. In any capital-intensive business this is a key
factor behind profitability. On passenger markets, load factors
reached record levels in the second quarter, and during the same
period, freight load factors began to recover from their lows.
Over the rest of the year the forecast anticipates that, although
demand is slowing, airlines will add capacity at an even slower
pace. Growth in available tonnes kilometers (a combined measure
for the passenger and cargo capacity) is forecast to be limited to
3.3% this year, compared with growth in both passenger and cargo
traffic of 3.5%. Load factors and aircraft utilization are
expected to be kept close to current high levels, limiting the
reduction in airline profitability.
Costs and Revenues: Limited capacity growth,
high asset utilization and lower oil prices will help to contain
cost increases in 2012 to 7.3%, down from a rise of 10.6% in 2011.
However, revenue growth is expected to slow more
significantly—from 9.3% last year to 5.7% this year. Air travel
volume growth has been revised upward, but outside the United
States this looks to have been partly achieved at the expense of
yield. Both passenger and cargo yields have been revised down from
the March forecast.
Profitability: Keeping revenues ahead of costs
is the constant challenge in the airline industry. In 2012,
operating revenues are expected to reach $631 billion, while
operating costs will grow to $623 billion. The resulting operating
profit or EBIT of $8.6 billion 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 $3 billion in 2012.
Outlook by Region
North America: North American carriers are
expected to post a profit of $1.4 billion. That is up from the
March projection of $0.9 billion and a slight improvement on the
$1.3 billion 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).
Europe: European carriers are expected to post
the industry’s largest aggregate losses of $1.1 billion as the
Eurozone crisis continues. This is a $0.5 billion 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
Asia Pacific carriers are expected
to make the largest contribution to industry profits ($2.0
billion), even with a $0.3 billion downgrade from the previous
outlook, due to the weak first quarter performance. This is less
than half the $4.9 billion profit that the region delivered in
2011 and a quarter of the $8.0 billion 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.
Middle East: The Middle East carriers are
expected to post profits of $0.4 billion, down from the March
projection of $0.5 billion. This is a significant drop compared
with 2011, when the region’s carriers returned a profit of $1.0
billion. 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 America: Latin American carriers are
expected to post profits of $0.4 billion. This is a $0.3 billion
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 ($0.3
billion). The main driver is a turnaround in the previously
loss-making Brazilian market, as capacity growth is reduced and
Africa: The outlook for African carriers is
unchanged with an expected loss of $0.1 billion. 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.
The risks to the forecast are primarily on the
downside. While the forecast is built on the market’s expectation
that the sovereign debt crisis in the Eurozone will intensify, the
risk of more severe economic weakness in the event of a broader
Eurozone banking crisis could easily wipe out industry profits.
Similarly, the recent softening in oil prices could easily reverse
should the ongoing dispute with Iran deteriorate, causing fears of
a disruption in oil supply to resurface.
The main upside risk would be a calming of the
Eurozone crisis. There is no scenario for an immediate solution to
the crisis, but actions to provide further liquidity on a large
scale and steps towards closer integration for Europe would give a
modest boost to industry profitability.
“There has been no let-up in the volatility of
the economic environment. A few months ago, an oil price crisis
was the biggest risk. Now all eyes are back on Europe. Markets are
expecting the Eurozone sovereign debt crisis to intensify and
economic damage to follow. But with little clarity on how European
governments will manage the situation beyond providing further
liquidity, the risk of a major downward shift in economic
prospects is very real. The next months are critical and the
implications are big,” said Tyler.
See other recent news regarding: