EasyJet will trial allocated seating in 2012 in a bid to break into the business market
If airlines entered 2011 unclear on the solidity of economic recovery, they go into 2012 with little doubt things are going to get harder again. Fresh from industry record profits in 2010 on faster-than-expected bounce-back, the strong first half of 2011 helped insulate airlines from economic woes. But while demand for air travel has been robust and hedging has cushioned high fuel prices, there seems to be limited protection for 2012.
In its latest industry forecast for 2012, IATA cut its collective profit projections by $1.4 billion, expecting airlines to make $3.5 billion in 2012, about half the profits expected for 2011. IATA chief economist Brian Pearce says international trade, a key driver of business travel, has stopped growing and business confidence has slumped. All this as austerity measures in Europe put the brakes on economic growth. IATA expects this to slow passenger growth in 2012 to 4% - well below the 6.1% expected in 2011. It also sees air freight traffic, which began sliding in the summer, staying flat next year.
At the same time, there is little sign of respite from high fuel prices, traditionally more benign when economies slow. "We've seen oil prices come down from their peak, but they are still 30% up on last year," says Pearce. He still expects oil prices to be around $100 a barrel, and with airline hedges unwinding, the price paid by airlines will be higher. The expected weaker-demand climate also makes it harder for airlines to claw back some of the higher fuel costs through surcharges, as they were able to do during the first half of 2011.
All this presupposes European policy-makers can prevent eurozone woes spiralling into a full-blown banking crisis. Such is the magnitude, IATA took the unusual step of issuing a separate forecast based on a worst case scenario. This could see all regions slip into loss, and total losses top $8 million. Yet it is a far from uniform picture. "Europeans, facing a sovereign debt crisis and economic austerity measures, are living a very different reality from their colleagues in Asia, which is buoyed by the market dynamism of China, and our colleagues in North America are managing through a sluggish economy with tight management," says IATA director general Tony Tyler.
North American carriers continue to benefit from the capacity discipline and disposal of older aircraft that followed the fuel spike in 2008. This has seen steady profits for most carriers. Continued tight capacity should see North American carriers positioned for another year of solid, if not spectacular, profits. Asia-Pacific carriers, while facing larger exposure to the stalled air-cargo market, continue to profit from overall growth in the region. "The fact that consumers in Europe and the USA have been cutting back spending is adversely impacting the manufacturing industry in China," says Pearce. But he points to profitability from the expansion of China's domestic market, while carriers in the region jockey to capture a chunk of the Chinese growth.
It is in Europe where the pressure will be most felt as austerity measures stunt growth and airlines in the region are hit further as the tax burden on air travel continues to rise. "There is one certainty for 2012: it will not be an easy rise for European airlines," says Association of European Airlines secretary general Ulrich Schulte-Strathaus, forecasting the region's network carriers could see operating losses of up to €2 billion ($2.6 billion) in 2012.
All this comes as a number of second-tier European operators look for investors. British Airways parent International Airlines Group moved for British Midland - driven by the slot opportunity at London Heathrow airport - but it remains to be seen whether similar value can be found in other carriers. London-based RBS analyst Andrew Lobbenberg says the main European airlines will only move forward on assets with a strong strategic logic. Gulf carriers have also shown interest. Qatar Airways has acquired a stake in freight operator Cargolux, while Etihad has been reported as a possible suitor for BMI and Aer Lingus. "They have got the money and an evident taste for the industry, but it's fairly challenging to see the industrial logic, even before you consider the aeropolitical complexities," says Lobbenberg. While the Gulf carriers continue to grow, high fuel prices will also hit their performances leading IATA to halve its profit forecast for the region's carriers and, almost a year after the Arab Spring first sprung, political uncertainty still affects some markets.
While Latin American carriers have been among the most profitable in recent years, intense competition has taken its toll in the key Brazilian market. This year should also see LAN and TAM finally complete their merger, creating the largest Latin American airline group by a distance. Next on the agenda will be the thorny issue of which alliance the merged group will call home - LAN being a long-standing Oneworld member and TAM part of Star Alliance.
During the financial crisis, particularly as short-haul premium traffic dived, low-cost carriers were well insulated. Most looked to attract more business travel, and expect further encroachment in 2012. EasyJet, for example, will trial allocated seating.