Airline profit forecast downgraded again
The profit forecast for global airlines in 2012 has been slashed by US$500 million.
The International Air Transport Association (IATA) said that rising oil prices would reduce full-year profits of the world’s airlines to just US$3 billion, compared to the previous prediction of US$3.5 billion. The earlier forecast, made in December last year, already marked a downgrade from IATA’s June 2011 prediction of US$4.9 billion annual profits. In 2011, the airline industry’s full-year profits reached US$7.9 billion.
The new forecast, which equates to a margin of just 0.5%, is based on an average oil price of US$115 per barrel in 2012, up from the previously forecast US$99. IATA added however, that several factors prevented a more significant downgrade. These included the avoidance of a major eurozone crisis, the improvement in the US economy, cargo market stabilization and slower capacity expansion.
“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 The risk of a worsening eurozone crisis has been replaced by an equally toxic risk – rising oil prices.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 US$3.0 billion,” said Tony Tyler, IATA’s Director General & CEO.
Tyler added that airline performance is closely tied to global GDP growth; 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 anaemic margin of 0.5%, it will not take much of a shock to push the industry into the red for 2012,” he added.
The revised oil price estimate of US$115 per barrel for 2012 will push jet fuel to 34% of airlines’ average operating costs and see the industry’s overall fuel bill rise to US$213 billion. IATA noted however, that political tensions in the Gulf region increase the risk of significantly higher oil prices, the implications of which could push the industry into the red.
If oil prices rise to a full-year average of US$135 and global GDP growth falls to 1.7%, the airline industry would likely register a global loss of US$5 billion for 2012.
“While we have seen some improvements in economic prospects any further significant rise in the fuel price will almost certainly turn weak profits into losses,” said Tyler.
Asia Pacific carriers are expected to perform well in 2012. This year the region’s airlines are expected to again deliver the profits of US$2.3 billion — the largest of any region and US$200 million more than estimated in December.
European carriers however, face by far the most difficult situation. The outlook remains unchanged from December with a US$600 million net loss forecast this year due to the weakness of the eurozone and the negative affect of regional taxation, including the ETS.
North American carriers are now expected to deliver profits of US$900 million, down from the previously forecast US$1.7 billion, but the region’s airlines will see the smallest deterioration from last year’s performance due to small increases in capacity.
Middle East carriers are expected to see profits of US$500 million, ahead of the previously forecast of US$300 million, while Latin American profits are expected to be US$100 million, unchanged from the previous forecast. Finally African carriers are still expected to post losses of US$100 million – also unchanged from December’s forecast.
Global passenger demand is expected to grow by 4.2% in 2012, 0.2 percentage points ahead of the December forecast, reflecting stronger business and consumer confidence in the US and Asia Pacific.
“Airlines are 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.
“A sustainable 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. 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.
“Today’s industry situation reinforces the need for governments to take a more strategic approach to aviation with competitiveness-enabling policies that will deliver broad economic benefits. This has been tried, tested and proven by many governments in Asia and the Middle East. Europe, India, the US and others should take note,” Tyler concluded.