IATA: A long slow struggle ahead for global airlines

The International Air Transport Association (IATA) has provided a small glimmer of good news with the upgrading of its industry profit expectations to US$6.9 billion, from $4 billion projected in June.


IATA struggle ahead for global airlines


IATA: A long slow struggle ahead for global airlines

The International Air Transport Association (IATA) has provided a small glimmer of good news with the upgrading of its industry profit expectations to US$6.9 billion, from $4 billion projected in June. But this slightly rosier projection was tempered by the fact that profitability at these levels is still exceptionally weak, with only a meagre 1.2 per cent net margin on the back of the industry’s total revenues of $594 billion. “Airlines are going to make a little more money in 2011 than we thought. That is good news, said Tony Tyler, IATA’s new director general and CEO. “Given the strong headwinds of high oil prices and economic uncertainty, remaining in the black is a great achievement, but we should keep the improvement in perspective. “The $2.9 billion bottom line improvement is equal to about a half a per cent of revenue. And the margin is a paltry 1.2 per cent. Airlines are competing in a very tough environment. And 2012 will be even more difficult,” he said. In its first look at 2012, IATA is projecting profits to fall back to $4.9 billion on increased revenues of $632 billion, resulting in a whittling down of the net margin to a mere 0.8 per cent. IATA’s forecast is built around global projected GDP growth of 2.5 per cent in 2011 falling to 2.4 per cent in 2012. Airline financial performance is closely linked to the health of world economies. Whenever GDP growth has slowed below two per cent the airline industry has lost money, according to IATA. “We will be perilously close to that level at least through 2012. The industry is brittle. Any shock has the potential to put us in the red,” said Tyler. Air cargo In terms of air freight, the stagnation which began from the earlier this year continues to linger with IATA slashing its full-year volume growth projection from 5.5 per cent to just 1.4 per cent. Airlines are expected to carry 46.4 million tonnes of cargo in 2011, down from the previous forecast of 48.2 million. Air freight volumes reached their post-recession peak in May 2010, largely driven by restocking. July’s traffic was four per cent lower than that level and IATA says it appears unlikely that a revival in air freight will begin before 2012. With rising passenger aircraft deliveries the cargo side also picked up additional belly capacity which pushed the freight load factor down to 45 per cent by July. This oversupply of belly cargo capacity is expected to result in no improvement in freight yields in 2011 with IATA expecting growth in yields to slip from its previous projection of four per cent growth. Overall the weaker freight market will see freight revenue projections fall to $67 billion, down $5 billion from the June forecast. Looking across the regions, Asia Pacific carriers are expected to return a $2.5 billion profit in 2011, up $400 million on the June forecast and while this is the largest absolute profit for any region, it marks a dramatic downturn compared to 2010 when the region delivered $8 billion profit. The weakness of air cargo markets is disproportionately affecting airlines from this region owing to the larger share of cargo in airline revenues. The shocks from the Japanese earthquake and tsunami continue to affect supply chains and cargo markets. There is some positive news with IATA noting that carriers in the Asia Pacific region expect a pre-Christmas rebound that will continue into 2012. Overall industry outlook But IATA noted that the overall industry outlook grows weaker in 2012 as debt-burdened Western economies look set for an extended period of weak economic growth, or worse. While developing economies look to be in much better shape, the prospects for industry growth are limited because many transport linkages are with developed nations. “The fourth quarter of 2011 and the first half of 2012 may well see the weakest point for air transport markets,” IATA said. “It looks like we are headed for another year in the doldrums. With business confidence declining, it is difficult to see any potential for significant profitable growth. Relatively stronger economic growth and some rebound in cargo will help Asia Pacific airlines to maintain their 2012 profits close to 2011 levels at $2.3 billion. The rest of the industry will see declining profitability. And the worst hit is expected to be Europe where the economic crisis means the industry is only expected to return a combined profit of $300 million. A long slow struggle lies ahead,” warned Tyler.