IATA Cuts Industry Profit Forecast By 54%
By Leithen Francis email@example.com
The International Air Transport Association (IATA) has slashed its 2011 profit forecast for the global airline industry by more than half to $4 billion.
“Natural disasters in Japan, unrest in the Middle East and North Africa, plus a sharp rise in oil prices have slashed industry profit expectations to $4 billion this year,” IATA Director General and CEO Giovanni Bisignani told delegates June 6 at the IATA annual general meeting in Singapore. “That we are making any money at all, in a year with this combination of shocks is a result of a very fragile balance. The 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 a little buffer for further shocks,” Bisignani says.
The $4 billion profit forecast compares to March’s forecast of $8.6 billion for the year and it is also far less than 2010’s net profit of $18 billion.
IATA says it revised the 2011 forecast because Brent crude oil prices have risen to $110 a barrel, 15% higher than the $96 a barrel it previously forecast. “For each dollar increase in the average annual price, airlines face an additional $1.6 billion in costs. With estimates that 50% of the industry’s fuel requirement is hedged at 2010 levels, the 2011 fuel bill will rise by $10 billion to $176 billion,” says IATA. Fuel is now estimated to comprise 30% of airline costs, more than double the 13% in 2001.
Higher fuel costs have already had some impact on passenger demand, with IATA now forecasting that passenger demand will grow 4.4%, which is 1.2 percentage points lower than what it forecast in March. Cargo demand is now forecast to rise 5.5% for the year and not 6.1% as earlier predicted. The consumer market segment most adversely affected is price-conscious consumers undertaking leisure travel, says IATA.
IATA says airlines this year are expected to increase capacity by 5.8%, but with demand only forecast to increase by 4.7%, this means passenger load factors are expected to fall. Airlines will try to adjust capacity by reducing aircraft utilization, but there will be a lag, it says. IATA notes that the passenger load factor for 2010 averaged 78.4%, but in April of this year the figure was 77%.
A problem that the industry faces is that the weakening in passenger demand is making it harder to pass on higher fuel costs to consumers, says IATA. There was an increase in yields but the problem now “is that higher travel costs are now weakening price-sensitive demand and airlines are not expected to offset higher costs with increased revenues”.
IATA warns that its revised forecast for the year may be subject to further change in the months to come. “The key risk to this outlook is a weakening of global economic growth,” the group says, but it adds the International Monetary Fund and others have raised growth projections.
A regional break-down of IATA’s forecast shows Asia Pacific carriers are forecast to be the most profitable with $2.1 billion, although still down on the $10 billion the region recorded in 2010. IATA notes that the tsunami and its aftermath in Japan are having a negative impact but growth in China and India is expected to offset this.
North American airlines are forecast to achieve a $1.2 billion profit, down from 2010’s profit of $4.1 billion. Fuel prices are having an even greater impact in this market because many carriers there operate older aircraft. The negative impact from Japan is also being keenly felt because 12% of international revenues are linked to Japan, IATA says. Some U.S. carriers use Japan as a fifth freedom hub.
European carriers account for a $500 million profit, down from 2010’s $1.9 billion. The sovereign debt crisis in Europe is adversely affecting passenger demand. Much of the profit forecast for this year is expected to be generated by more buoyant long-haul markets, IATA says.
Middle East carriers are only expected to generate a $100 million profit for the year, down from 2010’s $900 million, because of political unrest in the region.
Latin American carriers are forecast to post a $100 million profit for the year, down from 2010’s $900 million, says IATA, adding that consolidation in that market and innovative business models have helped drive profits.
African carriers, meanwhile, are forecast to make a $100 million loss overall. Political unrest in north African countries such as Egypt and Tunisia have pushed the region into the red, says IATA. Poor infrastructure and government restrictions there are also having an impact, it notes.