Mideast airlines profit to drop 43%

Middle Eastern carriers profit will drop near 43 per cent next year as the pace of demand will also halve, according to the International Air Transport Association's (IATA) latest forecast issued on Tuesday.

It said the regional airlines profit will slump to $400 million in 2011 compared to $700 million this year.

Globally, IATA revised its industry outlook for 2010 to a net profit of $15.1 billion, up from the $8.9 billion forecast in September.

Similarly the Association revised upwards its projections for 2011 to a net industry profit of $9.1 billion, up from the $5.3 billion forecast in September.

Net margins remain weak at 2.7 per cent for 2010 and falling to 1.5 per cent in 2011.

“Our profit projections increased for both 2010 and 2011 based on an exceptionally strong third quarter performance. But despite higher profit projections, we still see the recovery pausing next year after a strong post-recession rebound. And the two-speed nature of the recovery is unchanged with European airlines continuing to underperform other regions,” said Giovanni Bisignani, IATA’s Director General and CEO.

Bisignani also characterized the improvements in terms of profit margins, which continue to disappoint. “Margins remain pathetic. With a 2.7% net margin in 2010 shrinking to 1.5% in 2011, we are nowhere near covering our cost of capital. The industry is fragile and balancing on a knife edge. Any shock could stunt the recovery, as we are seeing with the results of new or increased taxation on airlines and travelers in Europe,” said Bisignani.

Shifts in the industry forecasts can appear dramatic in absolute numbers. It is important to relate them to the size of the industry to understand their significance. The $6.2 billion increase in IATA’s projection for the 2010 net profit (compared to the September forecast) is equal to just 1.1% of the industry’s projected $565 billion in revenues.

“Any increase in profits is a welcome step in the right direction. But the fact that we can increase our profit forecast by 70% and still be left with a net margin of just 2.7% shows just how far this industry has to go to achieve a normal level of profitability,” said Bisignani.

“The recovery cycle will pause in 2011. Although the $9.1 billion profit projection for 2011 is better than we had previously forecast, next year the industry will face tougher conditions than what we are experiencing today,” said Bisignani.

Regionally, North American carriers will see a 2010 profit of $5.1 billion decrease to $3.2 billion in 2011. Since 2007, US carriers have improved profitability successfully by adjusting capacity ahead of demand changes. The weak US economic recovery will limit demand increases to 3.7% (below the global average of 5.3%) while capacity will increase by 4.6%, driving the decrease in profitability.

Asia-Pacific carriers will post the largest profit in 2010 at $7.7 billion, decreasing to $4.6 billion in 2011. It remains the most profitable region of the world for airlines based on strong GDP growth (outside of Japan) of 6.6%, led by China. The 6.9% demand growth for 2011 is above the global average, but below the expected capacity expansion of 7.8%. The region’s carriers are particularly exposed to fluctuations in cargo markets. While this accelerated improvements in 2010, the region’s carriers will also be disproportionately affected by the expected slowdown in cargo next year.

European carriers will be the industry laggard among the major regions with a $400 million profit in 2010 shrinking to $100 million in 2011. Improvements from the previous forecast are based primarily on the strength of long-haul operations that take advantage of robust growth in other regions. Intra-European market conditions remain depressed as a result of the debt-crisis, slow economic growth, government austerity measures and increasing taxation. Profitability is further weakened by below trend demand growth of 3.5% alongside a 4.4% increase in capacity in 2011.

Latin American carriers will see their $1.2 billion profit in 2010 cut to $700 million in 2011. Demand growth of 6.3% in 2011 will be outstripped by a capacity expansion of 7.2%. Consolidation within the region and a robust regional economy, led by Brazil, will continue to support solid and profitable growth among the region’s leading carriers.

African carriers will see 2010 profits of $100 million move to break-even in 2011. As with other regions, a capacity expansion of 6.4% in 2011 will outstrip demand growth of 5.5%. The region’s carriers continue to benefit from a commodity-led economic expansion that is fueling growth in both regional and long-haul markets. 

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