The airline industry bounced back and recorded handsome profits in 2010, but it increasingly seems that 2011 may turn out to be a lacklustre year. The International Air Transport Association (IATA) slashed its 2011 profit outlook for the global airline industry to $4 billion last week, compared to an $8.6 billion profit forecast for the same year earlier in March.
With $598 billion in expected airline revenues for 2011, a $4 billion profit means a measly margin of 0.7 percent, which indeed leaves no buffer to absorb further shocks. Compared with an $18 billion net profit in 2010, the 2011 forecast looks abysmally low.
According to Giovanni Bisignani, IATAs CEO, "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 bulk of this profit will come from the Asia-Pacific carriers which carry roughly 40 percent of global freight volumes. Robust economic growth in India and China are expected to offset missed airline revenues due to the earthquake and tsunami in Japan.
North American carriers profitability will be dented by higher fuel prices and low fuel efficiency of their aircraft fleet, according to IATA. The sovereign debt crisis in the Euro zone and increased taxation on airline services will continue to impact European carriers bottom lines.
Political unrest in the Middle East and rising fuel costs will weaken demand from key passenger segments. The Latin American carriers will likely make most of the growing trade links of the region with the United States and Asian economies.
African carriers will, however, be the only ones to post a loss in 2011, owing to political and economic uncertainties following the regime change in Tunisia and Egypt - established tourist resorts - and lingering civil war in Libya.
There is a range of countervailing factors affecting the airline industrys profitability. IATA estimates that for each dollar increase in the average annual oil price, airlines face an additional $1.6 billion in costs. Fuel costs may soar to $176 billion in 2011 - nearly 30 percent of airline costs - because the average oil price (Brent) for 2011 is now expected by IATA to be $110 per barrel.
Due to higher fuel costs, growth in global passenger and cargo demands in 2011 have both been revised downwards to 4.4 percent and 5.5 percent respectively. IATA mentions decline in asset utilization - characterized by excess passenger & cargo capacities and lower average hours flown per aircraft - to be putting significant downward pressure on airlines profitability.
Although the number of price-sensitive leisure travellers has fallen in past five months due to higher airline fares, the less price-sensitive premium travel segment growth has been robustly supported by improvements in world trade, business investment and corporate earnings.
A weakening of global economic growth poses serious downside to the $4 billion forecast. Rising oil prices are a concern but not that serious as IATAs CEO said recently, "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 $110 per barrel" said."
This, however, remains to be seen as to how long the operational efficiency gains and improving global economic environment would keep the airline industry profitability from turning red if oil prices do not relent.
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Forecasted 2011 performance of regional airline industries
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Expected Declared Demand Capacity
profits profits growth growth
(2011) (2010) (2011) (2011)
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($ billion) (percent)
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Asia-Pacific 2.1 10 6.4 5.9
North America 1.2 4.1 4.0 4.0
Europe 0.5 1.9 3.9 4.8
Middle East 0.1 0.9 14.6 15.5
Latin America 0.1 0.9 6.0 6.9
Africa (0.1) 0.2 6.5 7.4
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Total 3.9 18 4.7 5.8
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Source: IATA
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