Profit Outlook Slashed Due To Oil Prices, Disasters, Political Unrest
By Jim Douglas
June 7, 2011 - The International Air Transport
Association (IATA) further downgraded its 2011 airline
industry profit forecast to $4 billion. This would be a
54% fall compared with the $8.6 billion profit forecast
in March and a 78% drop compared with the $18 billion
net profit (revised from $16 billion) recorded in 2010.
On expected revenues of $598 billion, a $4 billion
profit equates to a 0.7% margin.
“Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations to $4 billion this year. That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance” said Giovanni Bisignani, IATA’s Director General and CEO.
efficiency gains of the last decade and the strengthening global
economic environment are balancing the high price of fuel. But
with a dismal 0.7% margin, there is little buffer left against
further shocks.” The cost of fuel is the main cause of reduced
profitability. The average oil price for 2011 is now expected to
be $110 per barrel (Brent), a 15% increase over the previous
forecast of $96 per barrel. For each dollar increase in the
average annual oil price, airlines face an additional $1.6
billion in costs.
estimates that 50% of the industry’s fuel requirement is hedged
at 2010 price levels, the industry 2011 fuel bill will rise by
$10 billion to $176 billion. Fuel is now estimated to comprise
30% of airline costs—more than double the 13% of 2001.
This fuel price spike is substantially different from the one that occurred in 2008. First, while oil inventories are low, there is substantial spare OPEC and refinery capacity, which was not the case three years ago. Second, the monetary expansion that fuelled a surge in financial investments in commodities is ending, which will remove a major upward pressure on fuel prices. Nonetheless, volatility in the fuel prices remains one of the industry’s major challenges.
high energy prices, world trade and corporate earnings continued
to improve. As a
result, global GDP projections increased by 0.1 percentage
points to 3.2%, which is supporting continued growth in demand
for air transport. However, growth rates for both cargo and
passenger markets have been revised downward because of higher
fuel costs. Passenger demand is now expected to grow 4.4% over
the year, a full 1.2 percentage points below the 5.6% previously
forecast in March. Similarly, cargo demand is expected to
increase 5.5% and not 6.1% as predicted earlier.
The number of
price-sensitive leisure travelers has fallen 3–4% over the past five
months, as travel costs were forced higher by fuel prices and, in
Europe, by new passenger taxes. Less price-sensitive premium travel
demand has been more robust in the face of rising prices and continues
to be driven by growing world trade and business investment. Premium
passenger growth has dipped from the 9% of 2010, but is expected to be
close to the historical trend this year at a 5–6% rate.
(combined passenger and cargo) is expected to expand 5.8%, which is
above the 4.7% anticipated increase in demand. The gap between capacity
and demand growth has widened to 1.1 percentage points from 0.3
percentage points in the previous forecast.
Due to schedule
commitments and fixed costs, capacity adjustments are expected to
continue lagging behind the fall in demand, driving load factors down.
By April, passenger load factors were hovering around 77%. This is more
than a full percentage point below the 78.4% achieved for international
traffic in 2010. Aircraft utilization is also falling. This decline in
asset utilization, represented by lower load factors and average hours
flown per aircraft, is the most significant downward pressure on airline
conditions have given airlines some scope to partially recover higher
fuel prices. This is reflected in an increased yield growth forecast of
3% for passenger traffic (double the previously forecast 1.5%) and 4%
for cargo (up from the previously forecast 1.9%). The problem is that
higher travel costs are now weakening price-sensitive demand and
airlines are not expected to be able to offset higher costs with
The key risk to
this outlook is a weakening of global economic growth. High energy
prices will certainly have a slowing impact on economic growth. However,
the impact will be mitigated by two factors. First, while high oil
prices previously triggered recessions, today’s economies (which
generate a unit of GDP using just half the energy required in the
mid-1970s) are less sensitive.
corporate sector is cash-rich, business confidence is high, and world
trade continues to expand at around 9% annually. The International
Monetary Fund and others have raised global growth projections, which
would indicate a recovery in demand growth to the historical 5.6% level
for the second half of 2011. IATA’s forecast for continued, albeit
lower, airline profits despite $110 a barrel oil prices, is dependant on
a strong economy to generate sufficient revenues to partially offset
higher fuel costs.
carriers are expected to earn $2.1 billion—the most profitable of all
regions. Even so, this is dramatically down from the $10 billion profit
that the region achieved in 2010. Airlines in this region are more
exposed than others to cargo markets and fuel price fluctuations.
Asia-Pacific airlines carry 40% of all air freight volumes, while low
labor costs and relatively low hedging means fuel accounts for a bigger
proportion of total costs.
In addition, the Japanese earthquake and tsunami are expected to dent the region’s prospects for the remainder of the year. However, this will be more than offset by robust growth in both China and India. The continued dynamism of these economies means that Asia-Pacific is the only region where demand increases (6.4%) are expected to outpace capacity growth (5.9%).
North American carriers will see the $4.1 billion profit of 2010 fall to $1.2 billion. The region’s carriers are being hit on the cost side by rising fuel prices, exacerbated by an older, less fuel-efficient aircraft fleet. The region is also taking a hit on the demand side with 12% of international revenues linked to the Japan market. This is being offset somewhat by a stronger than expected US economy and stronger inbound demand and exports fueled by the weak US dollar. Careful capacity management is expected to see an overall demand increase of 4% balanced by an equal increase in capacity.
European carriers will deliver a $500 million profit, down from $1.9 billion in 2010. The sovereign debt crisis is dampening demand from the peripheral European economies. Core economies are benefiting from strong exports, but new and increased taxation of passengers is damaging price-sensitive demand. Much of the profit forecast for this year is expected to be generated on more buoyant long-haul markets. A capacity increase of 4.8% is expected to outstrip demand growth of 3.9%.
Middle East carriers will deliver a $100 million profit, down from $900 million in 2010. Political unrest in parts of the region is hurting demand. The major airlines in the region are expected to continue to win market share on long-haul markets, flying passengers via Middle Eastern hubs. However, high fuel costs will weaken demand from key passenger segments and asset utilization will be under downward pressure. Capacity growth of 15.5% is expected to outstrip demand expansion of 14.6%.
Latin American carriers will be the only region to deliver a third consecutive year of profits. The regional economies continue to show good growth, and trade links with the United States and Asia in particular are boosting traffic. Innovative business models and consolidation have combined to generate reasonable profits from these growing markets. But a $100 million profit is down considerably on the $900 million profit of 2010. Capacity growth of 6.9% will outstrip the 6% increase growth in demand.
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