Latest IATA Projection Reflects Surging Profits, Industry Volatility

 - September 22, 2010, 6:45 AM

The International Air Transport Association (IATA) revised its 2010 airline industry outlook to reflect a projected profit of $8.9 billion, compared with the $2.5 billion profit forecast it published in June. But despite what most would consider a glowing projection, IATA general director and CEO Giovanni Bisignani called for a “reality check” due to the razor-thin margins on which airlines operate. Meanwhile, in its first look into 2011, the association estimates that profitability will drop to $5.3 billion on a margin of 0.9 percent.

“This year is as good as it gets for this cycle,” said Bisignani. “Governments are running out of cash for pump priming. Unemployment remains high and business confidence is weakening. And we expect the 3.2-percent GDP growth of 2010 to drop to 2.6 percent in 2011. As a result, 2011 is looking more austere.”   

“The industry recovery has been stronger and faster than anyone predicted,” he explained . “The $8.9 billion profit that we are projecting will start to recoup the nearly $50 billion lost over the previous decade. But a reality check is in order. There are lingering doubts about how long this cyclical upturn will last. Even if it is sustainable, the profit margins that we operate on are so razor thin that even increasing profits 3.5 times only generates a 1.6-percent margin. This is below the 2.5-percent margin of the previous cycle peak in 2007 and far below what it would take just to cover our cost of capital.” 

IATA attributed its improved outlook for 2010 to a combination of factors, most notably increasing demand and disciplined capacity management, which it said are leading to sharply stronger yields and pushing revenues higher. At the same time, costs remain relatively stable.

Statistical highlights for this year include a 3- to 4-percent increase in traffic above pre-crisis levels of 2008. IATA expects demand to grow by 11 percent, compared with its previous forecast of 10.2 percent, while capacity expands by 7 percent, compared with the 5.4 percent it last projected. 

IATA added that yield improvements constitute the most important factor in the improved outlook. On top of last year’s capacity cuts, capacity expansion continues to lag behind demand improvements. The result is higher load factors and some pricing power for airlines. Meanwhile, more business travelers on premium seats are also boosting average yields. IATA now expects yields to grow by 7.3 percent for the passenger sector and 7.9 percent for cargo. The figures represent sharp increases over the 4.5 percent previously projected for both. Still, yields remain 8 percent below the pre-crisis levels of 2008.

IATA projects a $15 billion increase in revenues over the previous forecast, to $560 billion–a figure approaching the $564 billion in revenues achieved in 2008, when the previous economic cycle peaked before the start of the financial crisis.

The revised outlook maintains an average full-year crude oil price of $79 per barrel. However, excess refinery capacity is pushing the “crack spread” slightly lower than previously anticipated, resulting in lower prices for jet fuel. Even with stronger traffic, IATA projects the industry’s fuel bill to total $137 billion, $3 billion lower than forecast in June. Fuel continues to account for about 25 percent of industry costs.

While all regions except Africa showed improved prospects compared with the previous forecast, sharp differences remain, according to IATA. Again, the association sees the Asia-Pacific region leading all others with a $5.2 billion profit, while Europe registers the only loss. However, compared with June’s forecast, in which IATA expected Europe to lose $2.8 billion, the latest forecast shows a marked improvement, to a loss of $1.3 billion, due to gains in traffic into the continent resulting from its weak currency, which has stimulated exports and improved the air cargo business.    

Coloring IATA’s weaker projection for 2011, the effect of the post-recession bounce from restocked inventories will dissipate. The association does not expect consumer spending to pick up the slack, as joblessness remains high and consumer confidence falls in Europe and North America. Travel and freight markets will remain stronger in regions such as Asia, the Middle East and South America, it said. However, IATA does not expect those “hot spots” to sustain global growth in 2011. It expects slower growth to keep costs in check, while oil prices remain constant at $79 a barrel. Industry growth will fall back to 5 percent, according to IATA, in line with the historical trend. But a surge of aircraft deliveries (1,400) will fuel capacity expansion of 6 percent. As a result, according to IATA, falling load factors will remove the possibility for further yield improvement, leading to a more challenging revenue environment.