Asian carriers to make majority of worldwide airline profits this year

IATA expects asian carriers will earn US$2.1 bn this year, while the rest of the worlds airlines will only make $1.9 bn.

But its bad news for the industry, as The International Air Transport Association further downgraded its 2011 airline industry profit forecast to $4 billion. This would be a 54% fall compared with the $8.6 billion profit forecast in March and a 78% drop compared with the $18 billion net  recorded in 2010. On expected revenues of $598 billion, a $4 billion profit equates to a 0.7% margin.

"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% margin, there is little buffer left against further shocks," said Giovanni Bisignani, IATA’s Director General and CEO.

Forecast Highlights:

Fuel: The cost of fuel is the main cause of reduced profitability. The average oil price for 2011 is now expected to be $110 per barrel (Brent), a 15% 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% 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% of airline costs—more than double the 13% of 20
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"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.

This fuel price spike is substantially different from the one that occurred in 2008. First, while oil inventories are low, there is substantial spare OPEC and refinery capacity, which was not the case three years ago. Second, the monetary expansion that fuelled a surge in financial investments in commodities is ending, which will remove a major upward pressure on fuel prices. Nonetheless, volatility in the fuel prices remains one of the industry’s major challenges.

Demand: 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%, 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% over the year, a full 1.2 percentage points below the 5.6% previously forecast in March. Similarly, cargo demand is expected to increase 5.5% and not 6.1% as predicted earlier.

The number of price-sensitive leisure travelers has fallen 3–4% 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% of 2010, but is expected to be close to the historical trend this year at a 5–6% rate
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Capacity: Overall capacity (combined passenger and cargo) is expected to expand 5.8%, which is above the 4.7% anticipated increase in demand. The gap between capacity and demand growth has widened to 1.1 percentage points from 0.3 percentage points in the previous forecast. Due to schedule commitments and fixed costs, capacity adjustments are expected to continue lagging behind the fall in demand, driving load factors down.

By April, passenger load factors were hovering around 77%. This is more than a full percentage point below the 78.4% achieved for international traffic in 2010. Aircraft utilization is also falling. This decline in asset utilization, represented by lower load factors and average hours flown per aircraft, is the most significant downward pressure on airline profitability.

Yields: Robust economic conditions have given airlines some scope to partially recover higher fuel prices. This is reflected in an increased yield growth forecast of 3% for passenger traffic (double the previously forecast 1.5%) and 4% for cargo (up from the previously forecast 1.9%). The problem is that higher travel costs are now weakening price-sensitive demand and airlines are not expected to be able to offset higher costs with increased revenues.

Risks: The key risk to this outlook 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% 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% 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.

Asia-Pacific carriers are expected to earn $2.1 billion—the most profitable of all regions. Even so, this is dramatically down from the $10 billion profit that the region achieved in 2010. Airlines in this region are more exposed than others to cargo markets and fuel price fluctuations. Asia-Pacific airlines carry 40% of all air freight volumes, while low labor costs and relatively low hedging means fuel accounts for a bigger proportion of total costs. In addition, the Japanese earthquake and tsunami are expected to dent the region’s prospects for the remainder of the year. However, this will be more than offset by robust growth in both China and India. The continued dynamism of these economies means that Asia-Pacific is the only region where demand increases (6.4%) are expected to outpace capacity growth (5.9%).