IATA downgrades industry profit estimate to $4 b

The International Air Transport Association (IATA) has further downgraded its 2011 airline industry profit forecast to $4 billion.

This would be a 54 per cent fall compared with the $8.6-billion profit forecast in March and a 78 per cent drop from the $18-billion net profit (revised from $16 billion) recorded in 2010.

On expected revenues of $598 billion, a $40billion profit equates to a 0.7 per cent margin.

“Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations to $4 billion this year. That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance,” said Mr Giovanni Bisignani, IATA’s Director General and CEO.

“The efficiency gains of the last decade and the strengthening global economic environment are balancing the high price of fuel. But with a dismal 0.7 per cent margin, there is little buffer left against further shocks,” he said.

According to IATA, West Asian carriers will deliver a $100-million profit, down from $900 million in 2010.

Political unrest in parts of the region is hurting demand. Major airlines in the region are expected to continue to win the market share on long-haul markets, flying passengers via West Asian hubs. However, high fuel costs will weaken the demand from key passenger segments and asset utilisation will be under downward pressure.

Capacity growth of 15.5 per cent is expected to outstrip demand expansion of 14.6 per cent. The cost of fuel is the main cause of reduced profitability. The average oil price for 2011 is now expected to be $110 per barrel (Brent), a 15 per cent increase over the previous forecast of $96 per barrel.

For each dollar increase in the average annual oil price, airlines face an additional $1.6 billion in costs. With estimates that 50 per cent of the industry’s fuel requirement is hedged at 2010 price levels, the industry 2011 fuel bill will rise by $10 billion to $176 billion.

Fuel is now estimated to comprise 30 per cent of airline costs — more than double the 13 per cent of 2001.

“We have built enormous efficiencies over the last decade. In 2001, we needed oil below $25 per barrel to be profitable. Today, we are looking at a small profit with oil at $110 per barrel,” said Mr Bisignani.

This fuel price spike is substantially different from the one that occurred in 2008.

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