Rising Oil Prices
Decrease Airline Profitability With Regional Differences Widening
By Eddy Metcalf
March 26, 2012 - The International Air Transport
Association (IATA) announced a downgrade to its industry
outlook for 2012 primarily due to rising oil prices.
IATA expects airlines to turn a global profit of $3.0
billion in 2012 for a 0.5% margin.
This $500 million downgrade from the December forecast
is primarily driven by a rise in the expected average
price of oil to $115 per barrel, up from the previously
forecast $99. Several factors prevented a more
significant downgrade: (1) the avoidance of a
significant worsening of the Eurozone crisis, (2)
improvement in the US economy, (3) cargo market
stabilization and (4) slower than expected capacity
“2012 continues to be a challenging year for airlines. The risk of a worsening Eurozone crisis has been replaced by an equally toxic risk rising oil prices. Already the damage is being felt with a downgrade in industry profits to $3.0 billion,’’ said Tony Tyler, IATA’s Director General and CEO.
performance is closely tied to global GDP growth. Historically,
when GDP growth drops below 2.0%, the global airline industry
returns a collective loss. “With GDP growth projections now at
2.0% and an anemic margin of 0.5%, it will not take much of a
shock to push the industry into the red for 2012,” said Tyler.
revised upwards its estimated profits for 2011 to $7.9 billion
from the previously forecast $6.9 billion. This was primarily
owing to the much better than expected performance of Chinese
push fuel to 34% of average operating costs and see the overall
industry fuel bill rise to $213 billion. Political tensions in
the Gulf region increase the risk of significantly higher oil
prices, the implications of which could put the industry into
losses (see separate scenario described later in this release).
Overall capacity (passenger and cargo combined) is expected to
grow by 3.2% in 2012 (based on announced schedules) which is
behind the 3.6% expected expansion in demand. This is a reversal
of the expectation in December of capacity expansion (3.1%)
outstripping demand (2.9%). Both passenger load factors and
aircraft utilization have returned to or above pre-recession
Overall capacity (passenger and cargo combined) is expected to grow by 3.2% in 2012 (based on announced schedules) which is behind the 3.6% expected expansion in demand. This is a reversal of the expectation in December of capacity expansion (3.1%) outstripping demand (2.9%). Both passenger load factors and aircraft utilization have returned to or above pre-recession levels.
In January the
passenger load factor stood at 76.6%, which is more than 2 percentage
points higher than pre-recession levels. The average hours flown by
passenger aircraft is also close to pre-recession peak utilization
rates. Asset utilization in freight markets is more difficult to manage
as around 40% of cargo capacity is in the belly of passenger aircraft,
responding to different market pressures. Freight load factors in
January were 6% lower than the 2010 peak and average hours flown by
freighter aircraft were down 11%.
Passenger demand is expected to grow by 4.2%, which is 0.2 percentage
points ahead of the December forecast. January premium traveler numbers
were up 2.9% on previous year levels, while economy class travelers grew
by 6.1%. This reflects stronger business and consumer confidence in the
US and Asia-Pacific.
Cargo markets stabilized at low levels in the fourth quarter of 2011.
The pattern of rising sea freight and low level of air cargo is linked
to Asian economies buying bulk commodities while Western consumer
confidence is weak. Reduced pessimism among purchasing managers is
expected to support a moderate upturn in air cargo during the second
half of the year.
In December yields
were forecast to be flat in 2012 for both passenger and cargo. Higher
fuel costs, tighter capacity management in passenger markets and the
stabilization of freight markets is now expected to drive a 2.0% yield
improvement in 2012 for both passenger and cargo.
European carriers by far face the most difficult situation among the regions. The outlook remains unchanged from December with the expectation of a $600 million net loss and an EBIT margin of 0.3% of revenues. While it appears that a major worsening of the Eurozone crisis has been averted, many European economies are in deep recession which will see continued weakness in both the cargo and passenger business. At the same time air travel is being hit by taxation and the cost of the EU ETS.
North American carriers are expected to deliver a profit of $900 million, down from the previously forecast $1.7 billion. The 2.0% EBIT margin shares top position with Asia-Pacific carriers. Higher fuel costs are responsible for the downgrade, but airlines in this region will see the smallest deterioration from last year’s performance among the major regions, as a result of the very small increases in capacity expected.
Asia Pacific carriers continue to perform well. Better than expected performance in 2011, particularly by the Chinese carriers—saw an upward revision of 2011 profits to $4.8 billion (from the previous estimate of $3.3 billion). For 2012, the region’s airlines are expected to again deliver the largest absolute profit--$2.3 billion—which is $200 million more than estimated in December. Higher fuel costs will more than halve profits this year but the region’s relatively strong economies will continue to generate more rapid growth in travel and cargo than the other large regions.
Middle East carriers are expected to see profits of $500 million (up from the previously forecast $300 million). Financial performance was already seen to be better than previously expected in 2011, with an upgrade from $400 million to $1 billion. In the passenger business, load factors have improved by a slowdown in the introduction of new capacity, and long haul markets have been relatively robust.
Latin American profits are expected to be $100 million, unchanged from the previous forecast. Performance is mixed across the region, but intense competition in some major markets and slowing economies will make it more challenging for the region’s airlines to recover the increase in fuel costs they face this year.
are still expected to see losses of $100 million, unchanged from the
previous forecast. Some of the region’s economies are growing strongly
and generating expanding demand for air transport. However, passenger
and freight load factors are very low on average for airlines in this
region which will make it difficult to recover the rise in fuel costs.
A number of
commentators have pointed to a scenario where an escalation of the
crisis in Iran could see the closure of the Strait of Hormuz cutting off
vital supply links for oil. In this scenario, oil prices could spike at
$150/barrel for Brent crude mid-year, for a full year average of $135.
In such a scenario, global GDP growth would fall to 1.7%, plunging the
entire industry towards losses of over $5 billion.
buffeted by many forces beyond their control. Today’s forecast
demonstrates just how quickly the operating environment can change. Four
months ago the biggest worry was a European financial disaster; today it
is rapidly rising oil prices. Nimbleness and operating efficiency are
critical to maintaining competitiveness and managing through such
dramatic shifts,” said Tyler.
To survive through
turbulent times and shore-up competitiveness, airlines improved labor
productivity by 67%, increased fuel efficiency by 23%, and cut sales and
distribution unit costs by 21% (over the decade to 2010). Despite this,
even the best collective margin of the last decade is 2.9% (2007 and
2010), which does not cover the cost of capital.
airline industry could deliver much more to the global economy. But the
unintended consequences of many government policies have contributed to
keeping the industry on a knife-edge between profit and loss.
Short-sighted excessive tax collection in many markets undercuts
aviation’s ability to provide access to the connectivity that drives
global business,” said Tyler.
“Regulation implemented without a clear cost-benefit analysis often scores political points at the expense of industry efficiency let alone solving the problems it was intended to address. Failure to drive forward important infrastructure modernization projects such as NextGen and Single European Sky, limit the effectiveness of the billions of dollars that airlines are investing in more efficient and capable aircraft.”
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