Improved Profitability – But Europe Still Lags in the Red
Posted: 21 September 2010 | International Air Transport Association (IATA) | No comments yet
IATA revised its 2010 industry outlook and is now projecting a profit of $8.9 billion (up from the $2.5 billion forecast in June)…
The International Air Transport Association (IATA) revised its 2010 industry outlook and is now projecting a profit of $8.9 billion (up from the $2.5 billion forecast in June). In its first look into 2011, the Association estimates that profitability will drop to $5.3 billion.
“The industry recovery has been stronger and faster than anyone predicted. The $8.9 billion profit that we are projecting will start to recoup the nearly $50 billion lost over the previous decade. But a reality check is in order. There are lingering doubts about how long this cyclical upturn will last. Even if it is sustainable, the profit margins that we operate on are so razor thin that even increasing profits 3.5 times only generates a 1.6% margin. This is below the 2.5% margin of the previous cycle peak in 2007 and far below what it would take just to cover our cost of capital,” said Giovanni Bisignani, IATA’s Director General and CEO.
The improved outlook for 2010 is being driven by a combination of factors. On the revenue side increasing demand and disciplined capacity management are leading to sharply stronger yields pushing revenues higher. At the same time, costs remain relatively stable.
Forecast highlights for 2010
Demand and Capacity: Rapidly improving demand has pushed traffic 3-4% above the pre-crisis levels of early 2008. Demand in 2010 is expected to grow by 11% (stronger than the previous forecast of 10.2%) while capacity will only expand by 7.0% (up from the previous forecast of 5.4%).
Yields: Yield improvements are the most important factor driving the improved outlook. On top of last year’s capacity cuts, capacity expansion is lagging behind demand improvements. The result is higher load factors and some pricing power for airlines. More business travelers on premium seats are also boosting average yields. Yields are now expected to grow by 7.3% for passenger and 7.9% for cargo. This is sharply higher than the 4.5% previously projected for both. Even with this improvement, yields are still 8% below the pre-crisis levels of 2008.
Revenues: Revenues are expected to grow to $560 billion, $15 billion more than previously forecast. This is only slightly below the $564 billion in revenues achieved in 2008 when the previous economic cycle peaked and prior to the start of the financial crisis.
Fuel: The revised outlook maintains an average full-year crude oil price of $79/barrel. However, excess refinery capacity is pushing the “crack spread” slightly lower than previously anticipated resulting in lower prices for jet fuel. Even with stronger traffic the total fuel bill is now forecast to be $137 billion, $3 billion lower than forecast in June. Fuel continues to account for about 25% of industry costs.
While all regions except Africa showed improved prospects compared to the previous forecast, sharp differences remain.
Asia-Pacific: Asia-Pacific carriers are expected to post a $5.2 billion profit. This is better than the $3 billion recorded during the previous peak in 2007 and double the previously forecasted $2.2 billion. The strong improvement is based on strong market growth and yield gains. Renewed buoyancy in air freight markets has been particularly important for airlines in this region, where it can represent up to 40% of revenues. The 23.5% improvement in high volume intra-Asia premium traffic, due to a surge in business travel, is another of the driving factors.
Europe: Compared to the June forecast, the prospects for Europe’s carriers improved from a loss of $2.8 billion to a loss of $1.3 billion. The gains are largely attributed to traffic into Europe, boosted by the low currency which has stimulated exports and improved the air cargo business. Continuing economic weakness in the European economy and faltering consumer confidence continues to depress originating passenger traffic.
North America: North American carriers are now forecast to make $3.5 billion (up from $1.9 billion). US airlines cut capacity significantly as fuel prices spiked in 2008 and maintained a cautious approach to reinstating capacity to the market this year. The US economy and the resulting freight and air travel growth have grown at a better pace than in Europe. As a result, US airlines have seen a much larger rise in yields than other regions.
Latin America: Latin American carriers continue to benefit from very strong regional economic growth particularly in the south of the region, boosting freight, travel and profits. The profit forecast has improved slightly from $900 million to $1.0 billion.
Middle East: Middle Eastern airlines have benefitted from strong regional economies and an expanded share of long-haul markets. Unlike the previous two years, capacity has been added at a slower pace than demand growth in 2010, raising load factors and helping profitability. Carriers in the region are expected to see their profits rise significantly from $100 million to $400 million.
Africa: Prospects for African airlines remain unchanged from the previous forecast at $100 million profits.
Looking Ahead To 2011
The industry outlook grows weaker in 2011. The impact of the post-recession bounce from re-stocked inventories will dissipate. Consumer spending is not expected to pick-up the slack as joblessness remains high and consumer confidence falls in Europe and North America. Travel and freight markets will remain stronger in regions such as Asia, the Middle East and South America but we do not expect these hot spots to be able to sustain global growth in 2011. Slower growth is expected to keep costs in check and oil prices are expected to remain constant at $79/barrel. Industry growth is expected to fall back to 5%, in line with the historical trend. But a surge of aircraft deliveries (1400) will fuel capacity expansion of 6%—in excess of expected demand improvements. Falling load factors will remove the possibility for further yield improvement leading to a more challenging revenue environment.
“This year (2010) is as good as it gets for this cycle. Governments are running out of cash for pump priming. Unemployment remains high and business confidence is weakening. And we expect the 3.2% GDP growth of 2010 to drop to 2.6% in 2011. As a result, 2011 is looking more austere. We see profitability falling to $5.3 billion with a margin of 0.9%,” said Bisignani.