Airlines risk major losses from eurozone crisis

Global airlines could face losses of more than $8 billion (6 billion euros) next year if eurozone leaders fail to tackle the region's financial crisis, the industry's main trade group said on Wednesday. The International Air Transport Association (IATA), which represents 240 airlines and 84 percent of global traffic, said in a statement it was downgrading its forecast for airline profits next year from $4.9 billion to $3.5 billion, with a net profit margin of 0.6 percent.
It also warned that the eurozone crisis was putting "severe downside risk on the 2012 outlook" amid fears it will evolve into a full-blown European recession. "The biggest risk facing profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the eurozone debt crisis," IATA chief Tony Tyler said in the statement.
"Such an outcome could lead to losses of over $8 billion - the largest since the 2008 financial crisis," he said. The Geneva-based group said its outlook for 2011 profitability "remains weak but unchanged" at $6.9 billion, with a net profit margin of 1.2 percent. "The global forecast for 2011 is unchanged... But regional differences have widened, reflecting the very different economic environments facing airlines in different parts of the world," Tyler said.
"And the overall margin of 1.2 percent tells you just how difficult the battle for profitability in this business is," he added. In 2010 airlines had enjoyed $15.8 billion in profits after losses of $4.6 billion amid the economic downturn in 2009. "The aviation industry is a sector that is sensitive to the economic environment, with a volatile business model... It creates no value," said Pierre Boucheny, an analyst with Kepler Capital Markets.
"European carriers are by far in the most challenging position," the IATA said. "Higher passenger taxes and weak home market economies have limited profitability in Europe." It said Europe's carriers are forecast to generate collective profits of just $1 billion this year, down from a previous forecast of $1.4 billion.
For 2012, it said, "European carriers are expected to fall into losses of $600 million, hit by the weakness of their home market economies and further increases in passenger taxes." In contrast, North American carriers are expected to generate profits of $1.7 billion next year, Asia-Pacific carriers of $2.1 billion and Middle East carriers of $300 million.
Passenger demand meanwhile is expected to grow by 4.0 percent next year, down from a previous forecast of 4.6 percent, while cargo demand is expected to remain unchanged, it said. In the worst-case scenario of a European economic meltdown, all global airlines could expect to suffer losses, IATA said.
Europe would post the deepest losses at $4.4 billion, followed by North America at $1.8 billion and the Asia-Pacific region at $1.1 billion. The Middle East and Latin America would both be expected to post $400 million losses, while Africa would lose $200 million. "This admittedly worst-case - but by no means unimaginable - scenario should serve as a wake-up call to governments around the world," Tyler said.
"In a good year, the airline industry does not cover its cost of capital, much less in a bad one. But in a bad year, aviation's ability to deliver connectivity and keep the heart of the global economy pumping becomes even more vital to initiating a recovery," he said.