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2010 set to be as good as it gets

Industry profits to reach $9 billion this year, but economic and capacity concerns to weigh down 2011, writes Graham Dunn in London

The headline is good. IATA upwardly revised the industry's predicted profits for the year to nearly $9 billion, in stark contrast with the $5.6 billion it originally feared could be lost in 2010. But the fragility of the recovery and continued concerns over too much capacity cast a shadow.

A faster than anticipated economic pick-up, led from Asia, since the fourth quarter of 2009 has already led IATA to steadily improve its outlook over the last nine months. In June it was forecasting a profit of $2.5 billion for 2010. It now expects a profit of $8.9 billion profit this year. "The recovery has been absolutely astonishing," says IATA director general Giovanni Bisignani

Capacity discipline has been key to the improved outlook. IATA expects full-year traffic demand to grow 11% this year. As capacity will rise 7% over the year, improved load factors have boosted airline pricing power, which in turn has enabled them to lift yields from the floor. IATA in June was forecasting a 4.5% yield improvement for both cargo and passenger markets, but has upped that to 7.9% and 7.3% respectively in its latest forecast.

But for an industry seldom accustomed to good news, it should surprise few there are clouds on the horizon. IATA, noting a slowdown in fourth quarter traffic is already clear, warns 2010 will be as good it gets. "It will be the peak of this cycle. 2011 will be a much tougher year," says Bisignani. Indeed IATA projects industry profitability will slip back in 2011 to $5.3 billion.

Key is the fragile nature of the recovery, notably in developed markets like Europe and North America where consumer confidence remains low. "The inventory re-stocking cycle that drove growth last year is completed and we must now rely on consumer demand to achieve a sustainable recovery," says Bisignani. "With little improvement in employment levels around the world that seems unlikely."

Much has been made of the industry's restraint on capacity during the crisis. But airlines will want to restore utilisation rates, grounded aircraft are returning and new deliveries are on the way. IATA expects a capacity to outstrip demand growth in 2011, resulting in flat yields next year.

This spells out more bad news for Europe's beleaguered sector. IATA still predicts this region will be on the only one in the red this year with collective losses of $1.3 billion - in sharp contrast to the $5.3 billion profits set for Asian carriers - and will only reach break-even in 2011.

But bosses at American Airlines and British Airways played down talk of a double dip recession in their regions. "I'm not seeing any evidence to support concerns that are being expressed in some quarters of a double dip," says BA chief Willie Walsh, while Gerard Arpey at American says: "I'm encouraged that it increasingly doesn't look like we are headed for a double dip in the US, but I would have to describe the recovery as fragile."

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