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  • Forecast 2011: Asia set to lead the way again in 2011

Forecast 2011: Asia set to lead the way again in 2011

After profitability returned in 2010, the ability of airlines to keep hold of it remains strongly determined by their region. The mixed picture, where carriers in emerging markets in Latin America, the Middle East and in particular Asia prosper while Europeans struggle, seems set to continue. But after the 2010 bounce-back, flattening yields, slowing revenue growth and rising oil prices could cap profit growth for all. And debt recovery efforts of many developed economies seem to set to make it another tough year in Europe.

IATA is now estimating the industry will post net profits of $9.1 billion in 2011. This tops the $5.3 billion profit it anticipated three months ago as the recovery in 2010 continued to outpace expectations. This has been so strong that IATA now expects a record $15.1 billion profit for 2010. But there is a caveat. Today's profit levels come with lower margins. Operating margins should exceed 5% for 2010, but net margins are set to be under 3% and are to slip to 1.5% in 2011.


  •  Asia-Pacific: $7.7bn
  •  North America:  $5.1bn
  •  Latin America: $1.2bn
  •  Middle East: $700m
  •  Europe: $400m
  •  Africa: $100m
 Source: IATA forecast Dec 2010
Central to the outlook is the belief that revenue growth will slow and fuel costs are on the up. IATA expects passenger and cargo traffic to grow around 5% in 2011, far slower than this year's bounce-back. Capacity, which IATA says will outstrip traffic growth in 2011 at 6%, and economic difficulties will impact yields.

"In the last couple of quarters, capacity has returned largely because airlines are using their fleet more productively," says IATA chief economist Brian Pearce. 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 fortunes in 2010 saw Asia-Pacific carriers, aided by the strong cargo recovery, driving growth. Its airlines contributed more than half of industry profits. By contrast European carriers battled the region's slow recovery, although, after a better than expected third quarter, IATA now at least sees them in profit for 2010. IATA again expects Asia to be the mainstay of industry profits in 2011, while those in Europe will only scrape into profit.

This ties in with the economic outlook for developed and emerging economies. The OECD, for example, sees economic activity in OECD countries gradually picking up steam, but for uneven recovery and high unemployment to persist. It predicts OECD GDP growth of 2.3% for 2011.


  •  Asia-Pacific: $4.6bn
  •  North America:  $3.2bn
  •  Latin America: $700m
  •  Middle East: $400m
  •  Europe: $100m
  •  Africa: breakeven
 Source: IATA forecast Dec 2010
Contrast this with the high growth forecast for developing economies, particularly Asia. The Asian Development Bank projects growth of around 7% in East Asian economies in 2011 compared with nearly 9% this year.

Latin American, Middle Eastern and North American airlines are all forecast for solid, albeit smaller, profits, in 2011. While North American carriers continue to benefit from earlier capacity cuts, those in Europe face fragile economies. Consumer confidence is low as austerity measures kick in to cut debt levels, with recession fears refusing to go away.

While a deepening crisis in Europe will impact Asia, Pearce believes domestic demand will in part insulate its carriers. "The long-haul markets are significant, particularly for cargo. 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 more by Asian domestic."

Sharp differences in consumer and business confidence translates into 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.

Pearce points to positive business confidence and solid corporate profits. The Orbitz for Business/Business Traveller trend report shows a halving in the people feeling very or extremely obliged to save their company money when traveling. Pearce adds: "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 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 in 2010, struggling Ireland has opted to lower its airport departure tax to bolster tourism.

And the spectre of higher fuel prices continues. 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 be conservative.


Airline cargo departments are looking forward with cautious optimism to 2011, after an October to November peak season that was not as hectic as last year, but at least did not signal the start of a new downturn. There were widespread reports at the start of the normal peak period that it was not materialising as expected, but on the whole carriers have reported a respectably strong October and November. That impression is supported by the IATA figures for October which showed a 14.4% rise in traffic year-on-year.

That was lower than September's 15.5%, but since it was in October 2009 that the cargo recovery really kicked into gear, the figures in fact represent a slight uptick on seasonally adjusted basis, after a 5% decline since the height of the first half recovery in May.

Nick Rhodes, director of cargo for Cathay Pacific, says that the peak out of Hong Kong started in the second week in October, a bit later than normal, and reached its height in the first two week of November. Demand was strong to both the USA and Europe.

Lufthansa Cargo says that China in particular and Asia in general have been the engine of growth, but says transatlantic and South American markets have also been strong. Neel Shah, vice-president cargo for Delta says Latin America is 15-20% up year on year, with exports from the region particularly strong, and that Europe to USA traffic is up 20%, with the reverse direction up 10%.

Temporary Slack In Chinese Exports

Ram Menen, divisional senior vice-president cargo for Emirates also reports a good performance out of all markets, but sees a slackening in Chinese exports, and a slight slowdown in European imports due to the debt crises there. He thinks with inventories in the USA and Europe having been rebuilt earlier in the year, exporters from China are now in less of a rush to get goods to market, and have been looking at sea or sea-air options instead. But he expects this to be temporary. "As inventory gets depleted and with new launches of electronic and IT-related products, we should see more cargo in the new year."

A positive aspect of the recovery in air cargo to date has been that capacity has been kept in check. IATA says it rose 9.2% in the first ten months of 2010, well below traffic growth of 24%. Even in October the figure was behind traffic growth on 11.1%.

One reason for this could be a low level of new freighter deliveries and a delay in the delivery of the 747-8 Freighter, but Shah at Delta also points out belly capacity growth has been kept in check by caution on the passenger side of the business. "Speaking for the passenger carriers, I can say that we have learned our lesson on capacity. I hope that is also true of all the freighter operators," he says.


Chief financial officers will be busy this year. Capital markets are rebounding and airlines see this as the year to repair balance sheets hammered by the global financial crisis.

With their first profits since 2007, carriers with improved cash reserves are considering the advice of Glenn Tilton, chairman of United Continental Holdings, who sees this as the time to "deleverage" balance sheets - to use some of that cash to retire debt.

The big choice, explains Beverly Goulet, American Airlines treasurer, is deciding how much cash to keep for liquidity versus how much to use reducing debt. The other option is the bond markets, where debt can be re-financed at near-record low rates. Brazilian carrier Gol already tapped this in the fourth quarter by raising $356 million. Bond investors are attracted to airlines, despite the low rates on new issues, because airline bonds are outperforming other sectors.

Will interest rates stay low? Yes, if the US Federal Reserve succeeds in pumping $600 billion into the economy through its treasury bond buy-back. No one knows how much China's boost in bank minimum capital reserves, or Europe's sovereign debt woes will offset the Fed's move, but most bets are on interest rates staying low.

Not only will this help borrowers, but it will also fuel the rebound in equity markets. Among airlines, most of the action so far is in Asia, where Cebu Pacific successfully launched in late October the biggest-ever IPO by a low-cost carrier. It raised over half a billion dollars. Garuda Indonesia is moving toward its historic IPO in February.

Following General Motors' blockbuster IPO of $23 billion - the world's biggest - analysts believe that further boosted confidence among investors, who are anxious to find better returns than those available on bonds.

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