Dim Outlook for Air Transport Sector

 - January 1, 2012, 12:25 AM

A strong sales year in 2011 on the part of the world’s two major airliner manufacturers might portend a positive outlook for the air transport sector over the long term, but confidence in the profitability of the airline industry for this year continues to sag, according to the International Air Transport Association (IATA). In fact, the group expects profitability to decline by some $2 billion in 2012, and margins to settle at just 0.8 percent.

IATA’s recent Airline Business Confidence survey revealed an expectation that unit costs will increase while yields remain relatively miniscule. The majority of the CFOs and heads of cargo departments who participated in the survey expected no change in passenger yields while 90 percent of respondents expected cargo yields to either remain the same or decline this year.

The loss of confidence appears driven mostly by deteriorating economic conditions, particularly in developed markets such as the U.S. and Europe. But while the Eurozone debt crisis has prompted some analysts to compare today’s economic conditions with those of late 2008, airlines do not expect a similar fall in demand. Still, weakness of business and consumer confidence in developed markets suggests a risk that, in fact, a precipitous drop in air transport demand could materialize.

The fact remains that debt-burdened Western economies look set for an extended period of weak economic growth–or worse. While developing economies appear in much better shape, the prospects for industry growth remain limited because many transport linkages reside in developed nations. According to IATA, the first half of this year might well prove particularly weak for air transport markets.

“It looks like we are headed for another year in the doldrums,” said IATA director general and CEO Tony Tyler. “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.”

Speaking at Washington’s International Aviation Club last November, Tyler sounded as pessimistic as ever about the airline industry’s prospects for this year. “The high price of oil and an anemic economic outlook are the biggest issues,” he said. “Passenger traffic has been unexpectedly resilient, but it is difficult to imagine that trend continuing in the face of rising economic uncertainty and stubborn unemployment levels.

“The problem with the airline business will continue to be that it’s all turnover, and no leftover,” he added. “If we are right about 2012, it will mean that airlines, since 2001, lost $25 billion on $5.5 trillion in revenues. That is not a performance to attract new investment or enable fragile balance sheets to be repaired.”