IATA Warns of Effects of Eurozone Crisis On Airlines

 - December 7, 2011, 10:08 AM
IATA director general and CEO Tony Tyler warns of the potential for billions in airline industry losses next year. (Photo: IATA)

The International Air Transport Association (IATA) today announced revisions to its industry outlook for next year, downgrading its central forecast for airline profits from $4.9 billion to $3.5 billion for a net margin of 0.6 percent on threats posed by the so-called Eurozone crisis. It continues to forecast a weak, but unchanged, profit performance for this year, of $6.9 billion for a net margin of 1.2 percent, but it warned of a “severe downside risk” for 2012 based largely on the recently published economic outlook by the Organization of Economic Cooperation and Development (OECD).

Under a worst-case scenario, should the Eurozone crisis evolve into a full-blown banking emergency and European recession, the association estimates that the global aviation industry could suffer losses exceeding $8 billion next year.

Although IATA’s global forecast for this year remains unchanged, regional differences have widened, said IATA director general and CEO Tony Tyler, reflecting varying economic conditions in different parts of the world.

European Airlines Face Biggest Challenges

European carriers “by far” still stand in the most challenging position this year, according to the association. Higher passenger taxes and weak home-market economies have limited profitability in Europe, it said, resulting in a downward profit forecast from $1.4 billion to $1 billion, despite the region’s outstanding traffic growth this year. Yields have suffered and the base of strong demand grows more fragile as the sovereign-debt crisis escalates, it said.

For next year, IATA predicts a brief recession in Europe, even if government intervention averts a banking crisis. Historically, said IATA, the airline industry has seen profit turn into loss whenever global GDP growth falls below 2 percent. As recent global GDP forecasts suggest growth of just 2.1 percent, IATA’s outlook for 2012 has turned still more pessimistic. 

Key variables driving the downgrade include a downward projection in passenger demand from 4.6 percent to 4 percent, while cargo shows flat growth, compared with a previously forecast 4.2-percent expansion. Meanwhile, following previous projections of a 1.7-percent increase in passenger yields, IATA now expects both passenger and cargo yields to remain flat in 2012. In the cost category, IATA expects fuel to remain unchanged from the previous forecast of $198 billion, based on average price of oil of $99 a barrel. All told, it said, cost increases of 4.5 percent, to $609 billion, would outstrip a 3.7-percent gain in revenues, to $618 billion. 

Results Differ by Region

While IATA expects all regions to show profit deterioration, it also projects stark regional differences. For example, it expects European carriers to lose $600 million, while North American carriers generate profits of $1.7 billion on the world’s strongest EBIT margin of 2.4 percent, as limited capacity growth protects against downward pressure on profits.

Meanwhile, it projects that Asia-Pacific carriers will deliver the largest absolute profit at $2.1 billion. Although weaker than 2011’s expected performance, high load factors in markets such as China should limit the deterioration, said IATA.

In the Middle East, IATA expects carriers to post profits of $300 million—less than half the previously forecast value—as long-haul markets, particularly those linked to weak European economies, deteriorate.

Finally, the association sees a modest profit of just $100 million in Latin America, largely as a result of weakness in the Brazilian market, while African carriers lose $100 million due to weaker yields coupled with only modest load factor increases.  

“Even our best case scenario for 2012 is for a net margin of just 0.6 percent on revenues of $618 billion,” said Tyler. “But the industry is really moving at two speeds, with highly taxed European carriers headed into the red.”

Everyone Loses If Eurozone Banking Crisis Worsens

In a second scenario, based on the OECD’s view that a renewed banking crisis in the Eurozone would cut global GDP growth to 0.8 percent, IATA estimates the potential for global industry losses of $8.3 billion next year.

Under such a scenario, all regions would fall into red figures, said IATA, led by a $4.4 billion in losses in Europe, followed by North America at $1.8 billion and Asia-Pacific at $1.1 billion. The Middle East and Latin America would both post $400 million in losses, while Africa loses $200 million.

“This admittedly worst-case—but by no means unimaginable—scenario should serve as a wake-up call to governments around the world,” said Tyler. “In a good year, the airline industry does not cover its cost of capital, much less in a bad one. But in a bad year, aviation’s ability to deliver connectivity and keep the heart of the global economy pumping becomes even more vital to initiating a recovery. Government policies need to recognize aviation’s vital contribution to the health of the economy.”