Global Airlines' Profit Forecast Cut To $4 Billion


June 06--BANGKOK -- The International Air Transport Association (IATA), representing some 230 airlines comprising 93 per cent of scheduled international air traffic, Monday further downgraded its 2011 airline industry profit forecast to US$4 billion.

On expected revenues of $598 billion, a $4 billion profit equates to a 0.7 per cent margin.

The new forecast would be a 54 per cent fall compared with the $8.6 billion profit forecast made in March and a 78 per cent drop compared with the $18 billion net profit (revised from $16 billion) recorded in 2010.

"Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations to $4 billion this year. That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance. The efficiency gains of the last decade and the strengthening global economic environment are balancing the high price of fuel. But with a dismal 0.7 per cent margin, there is little buffer left against further shocks," said Giovanni Bisignani, IATA's Director General and CEO.

At the annual meeting, IATA called on the global aviation industry to build a platform for a sustainable future based on renewed leadership, continuous innovation, and a united stand in addressing challenges and finding solutions. In his annual State of the Industry address at the Association's 67 th Annual General Meeting (AGM) and World Air Transport Summit in Singapore, Bisignani also reported on the results of Vision 2050 -- IATA's initiative to determine a long-term vision for the air transport industry -- and reviewed the past decade to highlight achievements and unfinished business.

"After a decade of crises and shocks, airlines today are safer, stronger, leaner, and greener. But sustainable profitability remains elusive... The challenge is to prepare to handle 16 billion passengers and 400 million tonnes of cargo by 2050 with efficient infrastructure and effective technology, while making sustainable profits and satisfying customer needs," said Bisignani.

The organisation cited that fuel cost is the main cause of reduced profitability. The average oil price for 2011 is now expected to be $110 per barrel (Brent), a 15 per cent increase over the previous forecast of $96 per barrel. For each dollar increase in the average annual oil price, airlines face an additional $1.6 billion in costs. With estimates that 50 per cent of the industry's fuel requirement is hedged at 2010 price levels, the industry 2011 fuel bill will rise by $10 billion to $176 billion. Fuel is now estimated to comprise 30 per cent of airline costs--more than double the 13 per cent of 2001.

"We have built enormous efficiencies over the last decade. In 2001, we needed oil below $25 per barrel to be profitable. Today, we are looking at a small profit with oil at $110 per barrel" said Bisignani.

Despite high energy prices, world trade and corporate earnings continued to improve. As a result, global GDP projections increased by 0.1 percentage points to 3.2 per cent, which is supporting continued growth in demand for air transport. However, growth rates for both cargo and passenger markets have been revised downward because of higher fuel costs. Passenger demand is now expected to grow 4.4 per cent over the year, a full 1.2 percentage points below the 5.6 per cent previously forecast in March. Similarly, cargo demand is expected to increase 5.5 per cent and not 6.1 per cent as predicted earlier.

However, the number of price-sensitive leisure travellers has fallen 3-4 per cent over the past five months, as travel costs were forced higher by fuel prices and, in Europe, by new passenger taxes. Less price-sensitive premium travel demand has been more robust in the face of rising prices and continues to be driven by growing world trade and business investment. Premium passenger growth has dipped from the 9 per cent of 2010, but is expected to be close to the historical trend this year at a 5-6 per cent rate.

The costs are rising while airlines' capacity is also expected to expand 5.8 per cent this year, above the previous forecast of 4.7 per cent. Yield forecasts are expected to be 3 per cent and 4 per cent, for passenger traffic and cargo, respectively.

IATA noted that a key risk is a weakening of global economic growth. High energy prices will certainly have a slowing impact on economic growth. However, the impact will be mitigated by two factors. First, while high oil prices previously triggered recessions, today's economies (which generate a unit of GDP using just half the energy required in the mid-1970s) are less sensitive. Second, the corporate sector is cash-rich, business confidence is high, and world trade continues to expand at around 9 per cent annually. The International Monetary Fund and others have raised global growth projections, which would indicate a recovery in demand growth to the historical 5.6 per cent level for the second half of 2011. IATA's forecast for continued, albeit lower, airline profits despite $110 a barrel oil prices, is dependant on a strong economy to generate sufficient revenues to partially offset higher fuel costs.