Airline profits to drop 29% in 2012

The International Air Transport Association has said airline profits will drop by almost a third in 2012.

The IATA, which represents the airline industry, announced it expected industry profit to fall from $6.9 billion to $4.9 billion in 2012.

The organisation upgraded its expectations of industry profit from $4 billion in June to $6.9 billion but emphasized that profitability was still “exceptionally” weak as the industry’s total revenues were $594 billion.

IATA director general and chief executive Tony Tyler said while it was good that airlines were going to make more in 2011 than previously thought, the improvements should be kept in perspective.

“The $2.9 billion bottom line improvement is equal to about a half a percent of revenue. And the margin is a paltry 1.2%. Airlines are competing in a very tough environment. And 2012 will be even more difficult,” he said.

The organisation said its forecast was built around global projected GDP growth falling from 2.4% in 2011 to 2.5% in 2012.  It said that in the past whenever GDP had slowed below 2.0% the airline industry had lost money.

“We will be perilously close to that level at least through 2012. The industry is brittle. Any shock has the potential to put us in the red,” Mr Tyler said.

 

Forecast for 2011

Despite the “gloomy economic outlook”, IATA said passenger demand had been stronger than anticipated, with volumes up 6% in the year to July bringing total numbers to 2.833 billion, and the forecast for the year at 5.9% growth.

However air freight had “stagnated” since the start of the year, with full-year volume growth projection reduced from 5.5% to 1.4% by IATA, who said it appeared unlikely that a revival in air freight would begin before 2012.

Fuel was the big cost factor, with oil prices remaining consistent with previous forecast levels of $110 per barrel, 39% higher than the $79.4 average price of 2010.  IATA said a total fuel bill of $176 billion was expected to account for 30% of industry costs.

In particular, Asia Pacific carriers were expected to return a $2.5 billion profit in 2011, up $400 million on the June forecast.  IATA said this was the largest absolute profit, but that the region had also seen the most dramatic downturn compared with 2010, which saw the region deliver $8 billion profit.  The organisation said the weakness of the air cargo market was disproportionately affecting airlines in the region, owing to the larger share of cargo in airline revenues.

“The shocks from the Japanese earthquake and tsunami continue to affect supply chains and cargo markets (in which Asia Pacific carriers have the largest market share). A strong rebound is expected late in the year continuing into 2012.”

 

2012

The industry forecast of $4.9 billion is built around a growth in passenger markets of 4.6%, slower than projected for 2011 with yield growth falling to about half that expected in 2011.  Cargo market would grow at 4.2%, three times the growth in 2011, but with no yield growth, and the fuel bill would grow to 32% of airline costs, with a total bill of  $201 billion, IATA said.

Asia Pacific looks set to come out the best of the regions, with relatively stronger economic growth and a rebound in cargo helping the region to maintain close to 2011 profit levels at $2.3 billion, said Mr Tyler.

“The rest of the industry will see declining profitability. And the worst hit is expected to be Europe where the economic crisis means the industry is only expected to return a combined profit of $300 million. A long slow struggle lies ahead,” he said.

 

Air New Zealand deput chief executive Norm Thompson said the airline consistently performed better than the industry average.

“A review of the past five calendar years shows that our margin has been better than the industry as a whole for every one of those five years.”

He said Air New Zealand’s net profit margin in 2010 was 3.6% compared with IATA’s 2.9% and was 3.6% in 2009 compared with IATA’s -1% .

Mr Thompson said the airline expected growth out of the Australian market as the exchange rate settled, and was focussed on China, one of the biggest aviation growth markets.  He said Air New Zealand was expected the Japan and USA markets to return to growth scenarios and that there would be flow on benefits ahead from the Rugby World Cup.

 

A Jetstar spokeswoman said the airline had achieved a profit of $169 million and had recorded a 2% reduction in unit costs in the 2011 financial year. 

"This reflected a 14 per cent increase in passengers to 18.8 million, and shows that we continue to grow the size of our operations as well as our earnings, achieved through safely reducing costs and building ancillary revenue."

The airline had been profitable every year since it commenced operations, the spokeswoman said, and the Asia Pacific region was providing the airline with a significant platform for future long term growth.

“The Asia Pacific aviation market is the largest, and fastest growing, in the world.”

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