IATA: Weak economies mean weak airline profits

The International Air Transport Association reports the following:

The economic outlook has deteriorated since the June update of our forecast for airline industry profits. However, air travel expanded more strongly than expected during the first half of this year and airlines managed to restore asset utilization during the second quarter. The net impact of these factors has been to limit the deterioration in airline profits that we forecast for this year, but to extend the period of weak airline profitability into 2012.

We now expect airline industry net post-tax profits to total US$6.9 billion in 2011 (was $4 billion), after the $16 billion achieved in 2010. In our first look at the 2012 outlook we conclude that it will be a year of sluggish growth and weak profits, with net profits forecast at $4.9 billion.

The financial performance of the airline industry is closely linked to the health of world economies. If economic growth is strong airlines can cope with high fuel prices. But whenever world economic growth has slowed below 2% the airline industry has suffered losses. The weaker economic outlook is taking growth perilously close to that 2% rate. We forecast weak airline profits to continue into 2012.

In the year to July air travel volumes (measured by RPKs) were over 6% higher than they were the previous year, despite the demand shocks hitting Japan and MENA at the end of the first quarter, and weak economic growth in Q2. Yields rose in line with expectations which, together with stronger volumes, meant first half passenger revenues were stronger than looked likely in June.

Partially offsetting this encouraging development was the continued stagnation of air freight markets. In the second half of 2010 world trade was expanding strongly but, since the end of the business inventory cycle reduced the need for shippers to get product to market quickly, surface transportation met the increase in demand. However, so far this year there has been no further expansion in world trade and air freight has continued to show no sign of any revival. We had expected a second upward leg to the air freight recovery.

This now looks unlikely to materialize until 2012. But since air freight represents around 12% of airline revenues, the better performance of the passenger business more than offset the weakness of freight.