The International Air Transport Association (IATA) announced an upward revision to its global aviation outlook for 2012. The fall in airline profits from the $8.4 billion that the industry earned in 2011 will be cushioned by improved airline performance. Airlines are expected to earn $4.1 billion in 2012 (up $1.1 billion from the $3.0 billion forecast in June). The revision will still see the industry’s net profit margins fall from the 1.4% realized in 2011 to 0.6% (up from the previously forecast 0.5%). In a first look at 2013, the association sees global profits rising modestly to $7.5 billion, though this is a net margin of just 1.1%.
“The European sovereign debt crisis lingers on. China continues to moderate its growth. And the impact of recent quantitative easing in Japan and the US will take time to yield growth. While some of these risks have diminished slightly over recent months, they continue to take their toll on business confidence. The outlook improvement is due to airlines performing better in a difficult environment,” said Tony Tyler, IATA’s Director General and CEO.
Improved airline performance was evident in second quarter results, which showed operating profits close to those of the previous year, following a tough first quarter. The evidence is showing that consolidation is producing positive results. Asset utilization in the passenger segment is high across many markets. In past cycles passenger load factors and aircraft utilization would have fallen by this stage, in the face of slowing demand and increasing aircraft deliveries. In the current cycle airlines have kept both load factors and aircraft utilization high. This has allowed yields to improve and spread fixed costs more widely. However, asset utilization has fallen in the weaker cargo market, adversely affecting Asia-Pacific airlines in particular, where this business makes up a larger share of total revenues.
“Even six years ago, generating a profit with oil at $110/barrel (Brent) would have been unthinkable. The industry has re-shaped itself to cope by investing in new fleets, adopting more efficient processes, carefully managing capacity and consolidating. But despite these efforts, the industry’s profitability still balances on a knife-edge, with profit margins that do not cover the cost of capital,” said Tyler.
“Aviation has an important role to play as the global economy struggles. Growth is the only way forward and a healthy aviation industry can stimulate that—linking stagnating developed economies to robust emerging markets. Aviation connectivity spurs growth at both ends. That is why it is important for governments to ensure aviation’s ability to be a catalyst for growth is not constrained. Unfortunately, in many parts of the world, it is an uphill struggle with high taxes, onerous regulation and insufficient infrastructure. All of this stunts industry growth to the detriment of the world economy,” said Tyler.
Globally, aviation supports some 57 million jobs and $2.2 trillion in economic activity.
2012 Outlook Drivers
GDP: GDP forecasts have remained unchanged at 2.1% growth for 2012.
Oil Prices: Over the last three months, oil prices have been volatile, declining to below $90/barrel (Brent) in June and then peaking around $115 in late August. Overall, the forecast remains for an average oil price of $110/barrel for the year. Jet fuel prices, however, have increased by $1.20/barrel (in the June forecast) to $127.70. This will add $1 billion to the industry fuel bill, bringing an anticipated $208 billion cost for the year.
Passenger: The passenger market has performed well in the face of weak business confidence in Western economies. Demand is expected to grow by 5.3% over the course of 2012, which is 0.5 percentage points better than was foreseen in June. Over the first eight months of 2012 passenger demand has increased by 1.4 percentage points ahead of capacity. These tighter supply and demand conditions led to strong load factors which averaged at 79.3% for January to August 2012. This set the stage for a stronger yield growth which is expected to be 2.5% (one percentage point ahead of what was anticipated in June).
Cargo: On the cargo side of the business, demand has fallen into negative territory from the 0.3% expansion anticipated in June. Cargo is expected to finish the year with a 0.4% contraction on 2011 levels. For the first eight months of the year, cargo capacity grew by 3.0 percentage points ahead of demand. With about half of air freight traveling in the bellies of passenger aircraft, matching cargo capacity to demand is challenging. The weaker supply/demand environment has led to a more pessimistic outlook for cargo yields which are expected to average at 2.0% below 2011 levels (the previous forecast was for flat growth).
The 2012 outlook varies widely by region.
Europe: European airlines are expected to post the largest loss of any region at $1.2 billion ($0.1 billion worse than previously forecast). While governments and the ECB have taken measures to shore-up confidence in the Euro, these have been fraught with political difficulties. European carriers have seen moderate traffic growth but an indication of the difficult trading conditions can be seen in the premium travel market. In July, the important North Atlantic premium travel market was 2.4% below previous year levels and premium travel within Europe was down 3.5%. Additionally, the region is plagued by high taxes, inefficient air traffic management infrastructure and an onerous regulatory environment.
North America: North American carriers are expected to post profits of $1.9 billion in 2012, up $0.5 billion from the previous forecast and from the $1.3 billion that the region made in 2011. This is the largest improvement among all the regions, owing primarily to the impact of tight capacity management. Over the first eight months of the year, passenger demand grew by 1.3% while capacity expanded by just 0.2%. As a result, the region has also maintained consistently high load factors—averaging 83.2% for the January to August period.
Asia-Pacific: Asia-Pacific airlines are set to post a $2.3 billion profit for the year. That is $0.3 billion better than previously forecast. With 40% of the global cargo market, the region’s carriers are the most exposed to weak cargo demand. Over the first eight months of the year, cargo demand was down 6.6% on previous year levels, while capacity was trimmed by just 2.0%. Soft cargo markets have been more than offset by relatively robust performance in passenger markets. China, for example continues to have the fastest growing major domestic market, experiencing 9.4% growth over the first eight months of the year.
Middle East: Middle East carriers are expected to post a $0.7 billion profit, up $0.3 billion from the previous forecast. Although global cargo markets have been basically flat since the end of last year, the region’s carriers have captured the majority of what growth there has been. Over the first eight months of the year, the region’s cargo capacity has expanded by 13% while demand has increased by 14%. The region has also shown the strongest passenger traffic growth with a 17.1% increase in demand outstripping a 13.2% increase in capacity. The region’s carriers continue to expand their long-haul market share with connections through their expanding hubs. To illustrate the region’s growth, the share of international passenger traffic held by its carriers has expanded from 4.8% in 2002 to 11.5% in August 2012.
Latin America: Latin American airlines are expected to post a profit of $0.4 billion—similar to the previous forecast and an improvement on the $0.3 billion that the region made in 2011. North America and Latin America are the only regions with an expected improvement in profitability over 2011. The region continues to show robust growth in traffic, reflecting demand generated by strong trade flows from the region, but also robust growth in economies such as Mexico and Chile. Capacity cuts have stemmed airline losses on Brazil’s domestic market, bringing supply and demand into better balance. On international markets consolidation is also becoming evident in transactions such as the LATAM merger.
Africa: African airlines are expected to break even in 2012. This is an improvement from the $0.1 billion loss that was previously forecast. The region’s carriers have benefitted from the strong growth of many African economies, boosted in some cases by investment and trade links with China and for some by strong oil revenues. However, within the region airline performance continues to be very mixed. On average load factors are the lowest in the world as many of the region’s airlines struggle to match capacity with demand.
In its first look at 2013, IATA estimates industry profits rising to $7.5 billion, as economic forecasts point to slightly stronger economic growth and lower oil prices. That’s a better result than 2012 but with a profit margin of only 1.1% of revenues it still represents a return on capital far below other industries. The modest improvement is based on a forecast for global GDP of 2.5% growth (up from 2.1% in 2012). This will help fuel passenger traffic expansion of 4.5% and cargo expansion of 2.4%. Cargo markets, while expanding with strengthening world trade (which is forecast to grow at 5.1%, ahead of the 3.4% growth expected in 2012), will see yields fall by 1.5%. Passenger yields are expected to remain flat. Slightly lower oil prices ($105/barrel (Brent)) will be another driver of the improved performance. This will hold the industry’s fuel bill to $208 billion (the same as is expected for 2012) even when factoring-in industry growth. Meanwhile, revenues are expected to grow by $24 billion to $660 billion. While this will be a slower growth than the $39 billion expansion that is anticipated from 2011 to 2012, it is expected to lead to improved profitability owing to stable costs—particularly fuel.
Regional divergences will persist in 2013. North American airlines are expected to continue to improve profitability based on tight capacity management. Asia-Pacific carriers will see a profitability boost from improved cargo volumes (if not yields). European airlines are expected to be the only region in the red for 2013, although losses will be trimmed as a result of slower capacity growth and improved global trading conditions on long-haul markets.