The International Air Transport Association (Iata) on Wednesday downgraded its industry outlook for 2011 to $8.6 billion from the $9.1 billion it estimated in December 2010.  This is a 46 per cent fall in net profits compared to the $16 billion (revised from $15.1 billion) earned by the industry in 2010. 

Iata expects Middle East carriers to return a profit of $700 million in 2011. This is considerably better than the $400 million previously forecast, but down from the $1.1 billion profit that the region posted in 2010. Political instability in the region is expected to take its toll in Egypt, Tunisia and Libya which combined account for about 20 per cent of the region’s international passenger traffic. This is balanced by the Gulf area which benefits from economic activity related to high oil prices and whose hubs continue to win long-haul market share.  Load factors have also improved significantly for these airlines, as new capacity is being added at a slower pace than demand increases.

“Political unrest in the Middle East has sent oil over $100 per barrel. That is significantly higher than the $84 per barrel that was the assumption in December. At the same time the global economy is now forecast to grow by 3.1 per cent this year — a full 0.5 percentage point better than predicted just three months ago. But stronger revenues will provide only a partial offset to higher costs. Profits will be cut in half compared to last year and margins are a pathetic 1.4 per cent,” said Giovanni Bisignani, Iata’s Director General and CEO.

Iata raised its 2011 average oil price assumption to $96 per barrel of Brent crude up from $84 in December, in line with market forecasts. Including the impact of fuel hedging, which is roughly 50 per cent of expected consumption, this will increase the industry fuel bill by $10 billion to a total of $166 billion. Compared to levels in 2010, oil prices are now expected to be 20 per cent higher in 2011.

Fuel is now estimated to represent 29 per cent of total operating costs (up from 26 per cent in 2010).

Growing economies give airlines the opportunity to recover some of these added costs with additional revenues. For example, since early 2009, rising oil prices added 25 per cent to unit costs while average fares (excluding surcharges) rose 20 per cent.  But in 2011 higher revenues are not expected to be sufficient to prevent the rise in oil prices from causing profits to shrink by 46 per cent from 2010 levels.

An increase in global GDP forecasts to 3.1 per cent (from 2.6 per cent in December) bodes well for continuing strong demand for air transport. In line with this, Iata revised its passenger demand growth forecast to 5.6 per cent (from 5.2 per cent) and its cargo growth forecast to 6.1 per cent (up from 5.5 per cent). Overall, this will generate a 5.7 per cent expansion in tonne kilometers flown.

Iata said published airline schedules indicate a capacity increase of 6 per cent, slightly lower than the 6.1 per cent previously forecast. Of this, 5 per cent will come from the 1,400 new aircraft being introduced to the fleet over 2011. The additional 1 per cent is expected to come from the normalization of underutilized capacity in the twin-aisle fleet.

IATA also highlighted the risk of increasing taxation, particularly in price sensitive leisure markets. In 2010, the industry saw new and increased taxes in the range of 3-5 per cent of ticket prices in the UK, Germany and Austria. Recently, Iceland, India and South Africa have joined with plans for additional taxation. “This is a price sensitive business.
Aviation has the power to stimulate economies. But that ability is being compromised by adding taxes at a time when we are struggling to cope with high fuel prices just to maintain anemic margins,” said Bisignani.
 
Regional highlights

Asia-Pacific carriers are expected to deliver the largest collective profit of $3.7 billion and the highest operating margins of 4.6 per cent. This is down substantially from the $7.6 billion that the region’s carriers made in 2010 and from the previously forecast $4.6 billion for 2011. While the strong economic growth in the region is still driving profitability, inflation fighting measures in China are slowing trade and air cargo demand.

The key reason for the downgrade from December’s forecast is that the region is more exposed to higher fuel prices, due to relatively low hedging on average.

North American carriers are expected to deliver $3.2 billion profit, unchanged from the previous forecast and down from the $4.7 billion profit made in 2010.  Higher oil prices will damage profitability in 2011, but earlier cuts in capacity have led to much stronger conditions for yields than elsewhere.  The US economy has also been stronger than expected.

Compared to our December forecast, better revenues in 2011 will offset higher fuel costs.

European carriers are expected to make a $500 million profit. This is up from the $100 million previously forecast, but well below the $1.4 billion that the region’s carriers made in 2010.  It is the carry-over from better than expected 2010 second-half performance that has led to forecast revisions. The ongoing banking and government debt crisis are keeping domestic home markets fragile. But the weak Euro is continuing to provide stimulus to export industries, outbound freight and long-haul business travel which is driving the upgrading of the region’s profit forecast. Even so, Europe’s carriers remain the least profitable among the major regions with an EBIT margin of 1.1 per cent.

Latin American carriers are forecast to post a $300 million profit. This is down sharply from the $1 billion that the region made in 2010 and from the previously forecast $700 million. Strong economic growth and international trade in the region are driving travel and cargo demand and the region’s profits for airlines. Exposure to higher oil prices is the key reason for the expected deterioration in the region’s profitability this year.

African carriers are expected to break even. This is unchanged from the previous forecast but down from the $100 million profit that the region posted in 2010. Strong economic and transport demand growth on the back of foreign direct investment and rapidly growing trade links with Asia is keeping the region’s carriers out of the red. However, they face intensifying competition from Middle Eastern carriers and others for lucrative business traffic.