While IATA has improved its global industry profit forecast for both 2010 and 2011, the outlook for airlines in the year ahead remains clouded by flattening yields, rising oil prices and the debt recovery efforts of many developed economies, notably in Europe.
IATA is now estimating the industry will record net profits of $9.1 billion in 2011. This tops the $5.3 billion profit it anticipated three months ago as the strength of airlines' recovery in 2010 continued to outpace expectations. Such has been the strength of the recovery that IATA now expects to end 2010 with a record profit of $15.1 billion. But there is a caveat. "Today the industry has revenues of $500 billion. Back in the 90s it had revenues of $300 million and in that context it is not a record," explains IATA chief economist Brian Pearce. Operating margins should exceed 5% this year, but net margins remain are likely to be under 3% for 2010 and are expected to slip to 1.5% in 2011.
At the heart of the relatively downbeat outlook is the belief that revenue growth will slow this year and that fuel costs are on the rise. IATA expects passenger and cargo traffic to grow around 5% in 2011, well below the rates seen during this year's bounce-back. Here increased capacity, which IATA expects to outstrip traffic growth in 2011 at 6%, and continued economic difficulties to take a toll.
"In the last couple of quarters, capacity has returned largely because airlines are using their fleet more productively," Pearce says, noting this helped lift passenger yields. "But in Europe and North America, capacity is coming in as demand starts to slow down and those economic conditions which were very good for profitability are starting to decrease. Already yields are flattening and we don't think that we will see much of an increase in yields [in 2011]."
MIXED PICTURE |
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In 2010 the industry saw its most split financial picture yet; at one end of the spectrum Asia-Pacific carriers - aided by the strong recovery in cargo demand - driving profit growth. The region's carriers contributed more than half of the industry profits. By contrast European carriers have been mired in their home market's tough economic conditions, though following better than expected third quarter results, IATA now at least sees European operators moving out of the red this year.
IATA 2010 PROFIT FORECAST |
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| Source: IATA forecast Dec 2010 |
This ties in with the economic outlook for the developed and emerging economies. The OECD for example sees economic activity in the OECD countries "to gradually pick up steam over the next year" but sees an uneven recovery and unemployment to remain persistently high. It predicts GDP growth across OECD countries of 2.3% for 2011 rising to 2.8% in 2012.
Contrast this with the high growth seen in developing economies, particularly Asia. The Asian Development Bank in its latest Asia Economic Monitor projects average growth of around 7.3% in East Asia economies in 2011 compared to nearly 9% seen this year - itself driven by faster than expected growth in China.
"We think the majority of growth in the next few years is going to be within this region [Asia]," says Pearce. IATA anticipates the region will add a further 350 million passengers over the next five years - making it by far the biggest air market.
IATA also sees Latin America, the Middle East and North America with solid, albeit smaller, profits in 2011. While North America carriers continue to benefit from the capacity cuts they made following the oil crisis, European carriers
IATA 2011 PROFIT FORECAST |
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| Source: IATA forecast Dec 2010 |
While economists in Asia have warned the region's own growth could be slowed by a deepening of the crisis in Europe in 2011, Pearce believes the strong domestic Asian demand will drive its growth. "Everything [in air transport] is connected, the long-haul markets are significant, particularly for cargo," says Pearce. "But I think the situation is a bit different this time. We haven't seen North America and Europe recover and the growth in Asia has been driven much more by Asia domestic. This does help to insulate them more than previously."
BUSINESS AND LEISURE |
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Alongside the mixed regional picture, there is a widely differing perspective between consumer and business confidence, which in turn drives differing outlooks for business and leisure travel. It has been the strong return of premium traffic on long-haul markets which has also helped to drive the improved profit picture.
"Business confidence is still positive. The corporate sector, even in Europe, is still in pretty good shape," he says. "But if you look at leisure, there are vast differences in consumer confidence. That's going to make a big difference in leisure travel."
Further concerns on the horizon come from fears that more taxes could pop up as countries seek to balance the books. But while new levies in Germany and Austria emerged earlier this year, interestingly struggling Ireland has just taken a different tack, announcing plans to reduce its airport departure tax in a bid to bolster tourism.
And the spectre of higher fuel prices continues for an industry still with the scars from the oil price peaks of 2008. IATA has increased its forecast for the 2011 oil price from $79 per barrel three months ago to $84 a barrel, and director general Giovanni Bisignani acknowledges with the oil price now over $90 this year, this forecast could turn out to be on the conservative side.
Source: Airline Business
