The International Air Transport Association (IATA) announced revisions to its industry outlook with profitability for 2011 remaining weak but unchanged at 6.9 billion dollars for a net margin of 1.2%.
Looking ahead to 2012, IATA downgraded its central forecast for airline profits from 4.9 billion to 3.5 billion for a net margin of 0.6%.
The Euro zone crisis puts severe downside risk on the 2012 outlook as illustrated by the recently published OECD economic outlook. In a worst case scenario, should the Euro zone crisis evolve into a full-blown banking crises and European recession, IATA estimates that the global aviation industry could suffer losses exceeding 8 billion dollars in 2012.
“The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the Euro zone sovereign debt crisis. Such an outcome could lead to losses of over 8 billion dollars, the largest since the 2008 financial crisis,” said Tony Tyler, IATA Director General and CEO.
Even if government intervention averts a banking crisis it is unlikely that Europe will avoid a brief recession. Business and consumer confidence has already fallen too far. Global GDP growth forecasts for 2012 have been revised downwards to 2.1%. Historically the airline industry has seen profit turn into loss whenever global GDP growth falls below 2%. This is driving the downgrade in the 2012 outlook.
Key variables driving this downgrade:
Demand: Passenger demand is expected to grow by 4.0% (down from previously forecast 4.6%), while cargo is expected to show flat growth (down from the previously forecast 4.2% expansion).
Yields: Passenger and cargo yields are expected to remain flat in 2012. While this is unchanged for cargo, passenger yields were previously forecast to grow by 1.7%.
Fuel: Fuel costs are relatively unchanged from the previous forecast at $198 billion. That is based on oil at $99 per barrel (against a previous forecast of $100 per barrel).
Revenues and Costs: Industry revenues are expected to grow by 3.7% to 618 billion. This will be outstripped by cost increases of 4.5% to 609 billion dollars.
All regions are expected to show profit deterioration from 2011. However, the regional differences in 2012 are stark: European carriers are expected to fall into losses of 600 million dollars; North American carriers are expected to generate profits of 1.7 billion, maintaining the strongest EBIT margin of 2.4%, as limited capacity growth is providing some protection against the downward pressure on profits. Asia-Pacific carriers are expected to deliver the largest absolute profit at 2.1 billion dollars. This is weaker than 2011’s performance but the deterioration is limited by high load factors on markets such as China. Middle East carriers are expected to post a 300 million profit, less than half the previously forecast 700 million profit, as long-haul market conditions deteriorate, in particular those linked to the weak European economies.
Latin American will see profits decline to 100 million—a 400 million negative swing from the previous forecast, partly a carry-over from the recent weakness of profitability in the large Brazil market. Finally African carriers will fall into losses of 100 million dollars, unchanged from the previous forecast. Economies and air transport markets continue to grow in the region, but load factors are not expected to be strong enough to offset the impact of weaker yields on profitability.
“Even our best case scenario for 2012 is for a net margin of just 0.6% on revenues of 618 billion dollars. But the industry is really moving at two speeds with highly taxed European carriers headed into the red,” Tyler said.