The International Air Transport Association (IATA) revised its industry outlook for 2010 to a net profit of 15.1 billion USD (up from the 8.9 billion forecast in September). Similarly IATA revised upwards its projections for 2011 to a net industry profit of 9.1 billion (up from the 5.3 billion forecast in September). However net margins remain weak at 2.7% for 2010 and falling to 1.5% 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 under perform 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 travellers in Europe,” said Bisignani.
IATA chief said that shifts in the industry forecasts can appear dramatic in absolute numbers but 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”.
All regions are following the global trend of reduced profitability in 2011 compared to 2010.
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.
Middle East carriers are expected to see 2010 profits of 700 million shrink to 400 million in 2011. It will be the fastest growing region in both 2010 and 2011. But the pace of demand growth will halve from 21.5% in 2010 to 10.5% in 2011.
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 7.2% capacity expansion. 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 fuelling growth in both regional and long-haul markets.