Global airline industry profits to falter at $3bn in 2012

A second year of declining returns expected since profits peaked in 2010.

Low-flying jets: profits to decline once again. Photograph: Getty Images

Global airline industry profits are expected to be $3bn in 2012, yielding a net profit margin of just 0.5 per cent, according to a new forecast released by the International Air Transport Association (IATA). The estimate takes into account the likelihood that the sovereign debt crisis in the eurozone will intensify.

If the forecast holds, this will be the second year of declining returns since airline profits peaked in 2010 at $15.8bn, with a net profit margin of 2.9 per cent. In 2011, industry profits fell to $7.9bn for a 1.3 per cent net profit margin.

Compared with the previous forecast in March, North American and Latin American carriers are expected to see improved prospects. The outlook for African carriers is unchanged. But the outlook for European, Asia-Pacific and Middle Eastern carriers has been downgraded, with European losses now expected to be $1.1bn (nearly double the previously forecast $600m loss).

Tony Tyler, director-general and CEO of IATA, said:

The $3bn industry profit forecast has not changed. But almost everything in the equation has. Demand has been better than expected so far this year. And fuel prices are now lower than previously anticipated but that’s on the expectation of economic weakness ahead. The eurozone crisis is standing in the way of improved profitability and we continue to face the prospect of a net profit margin of just 0.5 per cent.

A summary of global trends:

Traffic

Markets in Asia, Latin America, and the Middle East, where economies have been more robust, will remain strongest in 2012. However, a weaker second half of the year is expected as deepening problems in Europe damage confidence. Passenger numbers are expected to reach 3.0 billion this year, up from 2.8 billion in 2011.

Profitability

Operating revenues are expected to reach $631bn this year, while operating costs will grow to $623bn. The resulting operating profit or EBIT of $8.6bn reflects the narrowness of the gap between revenues and costs.

Capacity and costs and revenues

Growth in available tonnes kilometres, a combined measure for the passenger and cargo capacity, is forecast to be limited to 3.3 per cent this year, compared with growth in both passenger and cargo traffic of 3.5 per cent. Revenue growth is expected to slow from 9.3 per cent in 2011 to 5.7 this year.

Oil prices and economic growth

Oil prices have slipped below $100/barrel (Brent), as the eurozone crisis generated fears of recession, having been above $120/barrel earlier this year. Even with this price softening, fuel is still expected to account for 33 per cent of airline operating costs.

The world GDP growth, a key driver of airline profitability, is expected to be 2.1 per cent this year. Historically, the airline industry has fallen into losses (at a global level) when world GDP growth declined below 2 per cent.

Tyler added:

Although airlines face the common challenges of high fuel prices and economic uncertainty, the regional picture is diverse. Carriers in the Americas are seeing improved prospects for 2012. The rest of the world is seeing reduced profitability. For European carriers, the business environment is deteriorating rapidly resulting in sizable losses.

Outlook by region:

In 2012, North American carriers are expected to post a profit of $1.4bn, while European carriers are expected to post aggregate losses of $1.1bn as the eurozone crisis continues.

This year, Asia-Pacific carriers are anticipated to make a contribution of $2bn for industry profits, while the Middle East carriers are expected to post profits of $0.4bn, down from the March projection of $0.5bn.

Latin American carriers are expected to post profits of $0.4bn this year. The outlook for African carriers is unchanged with an expected loss of $0.1bn.