Europe set to be left behind as airline profits bounce back

IATA's headline figure is the first global industry profits for three years, but troubles remain in Europe

While the speed of the recovery took some by surprise in March when IATA ended a series of downward forecasts with a positive revision, the news IATA now expects to see the first industry profits for three years was probably in line with the cautious optimism pervading large parts of the sector. IATA now expects industry profits of $2.5 billion for 2010. This compares to its forecast of a $2.8 billion loss just three months ago, itself a halving of the loss it anticipated in December.

It demonstrates the rapid change of fortunes for most regions since Asia in particular began leading a quicker than anticipated recovery out of the recession in the fourth quarter of last year. IATA is predicting things to have improved to such an extent that while only one region, Latin America, stayed out of the red in 2009, it now expects all but one region to record profits this year.

But worryingly for European airlines, IATA is not only predicting European airlines will continue to lose money this year, but has now widened their loss forecast for 2010 by a further $600 million to $2.8 billion. "It is the first time you have such a divided situation," says IATA director general Giovanni Bisignani.

In Asia the picture has been looking healthy for a while. First traffic recovering and now tentative signs of yield improvement. Asia is expected to lead the industry's return to the black with a $2.2 billion profit this year, reflecting GDP growth in the region of nearly 3%. While strong domestic demand in India and China has lead the region's growth, IATA chief economist Brian Pearce says there is a strong performance across almost all the region.

North America is the region where IATA has seen the sharpest turnaround since its March forecast. The forecast shows a near $4 billion swing to a projected profit of $1.9 billion this year. "We have seen a significant improvement in North American airlines, which we hadn't expected three months ago," explains Pearce. "They have increased unit revenues, probably as a result of the earlier capacity cuts and increased load factors."

Latin America, which came out relatively unscathed from the financial crisis, is expected to secure a second consecutive year of profits at around $900 million. Notably IATA now expects both Middle East and African carriers to post small collective profits this year, for the first time since 2005 and 2002 respectively.

"Geographically its a very unbalanced picture and you are seeing that in the performance of the airlines. It really depends where the network is based. The same is true of yields," says Pearce.

Leading the improved overall financial picture has been the faster than anticipated rebound in passenger and cargo traffic. IATA has already revamped its full-year traffic projections. Passenger levels are now expected to rise 7.1% this year, compared with its earlier forecast of 5.6% growth. Cargo traffic growth is now projected to be 50% faster at 18% for the year.

"At the moment we are seeing a pretty strong rebound in passenger traffic and airfreight coming back at around 25%," says IATA chief economist Brian Pearce. "In terms of volume of business we are back to were we were before the recession."

On the cargo side this has been driven by businesses restocking inventories after the sharp drop in demand as the crisis hit last year. "It looks like that process has come to an end," though Pearce adds. "Business inventories look in tune with sales. We would expect it [growth] to go single figures and be driven by consumer spending."

Passenger traffic has been growing strongly, and while this growth came hurtling off the rails in April (global traffic down 2.4%) because of the ash cloud disruption to European airspace, hopes are high this will just prove a blip.

"Airlines are starting to bring back frequency and upsize aircraft," adds Pearce. "But it is coming back at a much slower pace than the return of demand. Load factors are pretty much at record levels, the planes are full again."

Even the hard hit premium travel sector is showing signs of coming back, albeit in volume rather than yield level. "We are starting to see premium travellers coming back. What we saw with premium travel seems to be cyclical rather than structural."

But Pearce caustions: "We are not seeing the same recovery in yields, Yields have generally been tracking downwards, and we don't see any reason that won't continue." And he adds that while average fares are rising, so too over the last year are airline costs through the steady rise in fuel prices, thus eating into airline profitability.

There are other risks and concerns too, amid the cautious optimism, in particular around Europe. Uncertainty prevails with the currency crisis in the euro zone and the impact on the economy of efforts by European government efforts to cut large budget deficits, in contrast to the financial stimuli pumped into economies in the immediate aftermath of the crisis. "The real danger of the withdrawal of the financial stimulus is European economies will be weaker for longer," says Pearce.

Similarly IATA raises concerns, seemingly bourne out by German plans for a new departure tax, the sector maybe subject to fresh taxes as part of these deficit recovery efforts. "Clearly governments will want to reduce budget deficits and they see air transport and passengers as an easy target. We would argue the industry is still too fragile in air transport," says Pearce.

And while part of the improved performance of the industry has been a disciplined approach to capacity, how the industry handles the large number of aircraft due to join the fleet over the coming years remains key. Pearce says that so far demand has been growing faster than airlines can bring capacity back, but that over-capaicty could be one of the risks later in the year.

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Source: Airline Business