Sharply rising oil prices as a result of continuing turmoil in the Middle East have caused a measurable drop in predicted global airline profits for 2011, according to IATA.

Since its last industry outlook in December 2010, IATA says predictions for airlines' profits for 2011 have dropped to $8.6 billion from $9.1 billion. On expected industry revenues of $594 billion, this equates to a net profit margin of a "pathetic" 1.4%, says IATA director general Giovanni Bisignani.

IATA's downgraded profit prediction represents a 46% drop in industry net profits from the $16 billion earned in 2010.

Last December, IATA estimated the average 2011 cost of a barrel of oil at $84. Currently, it is above $100 a barrel, with a new prediction of $96 for 2011 as a whole. Bisignani notes that the price is now being driven by market speculation on events in the Middle East rather than by the strengthening global economy. "This is a significant downside risk," he says.

Although the global economy is now forecast to grow at 3.1% this year, a significant rise from the 2.6% predicted just three months ago, this is not sufficient to offset the detrimental impact of rising oil prices, he adds.

With airlines "performing a balancing act on a very thin tightrope of a 1.4% margin...there is very little buffer for the industry to keep its balance as it absorbs shocks", says Bisignani.

Additional negative factors faced by carriers include the increasing tendency for governments to improve their balance sheets by imposing new or increased taxes on aviation, according to IATA.

"This is a price-sensitive business. Aviation has the power to stimulate economies. But that power is being compromised by adding taxes at a time when we are struggling to cope with high fuel prices just to maintain anaemic margins," says Bisignani.

Airline capacity is expected to grow by 6% in 2011, with demand forecast to rise 5.7%. This gap of 0.3% has narrowed appreciably from the last prediction of 0.8%.

Passenger load factors have weakened slightly, says IATA, but in January they remained at near-record levels at a seasonally-adjusted 77.7%. Passenger yields are anticipated to rise 1.5% (up from the previously-predicted 0.5%), while cargo yields are forecast to rise to 1.9%, up from the previous forecast of no growth.

Asia-Pacific carriers are expected to deliver the best profit figures in 2011, with their European counterparts producing the worst.

Source: Air Transport Intelligence news