High oil prices, natural disasters and political
unrest take their toll:
Airline industry 2011 profit outlook slashed to $4 billion
The International Air Transport Association (IATA) further downgraded
its 2011 airline industry profit forecast to $4 billion.
This would be a 54 percent fall compared with the $8.6 billion profit
forecast in March and a 78 percent drop compared with the $18 billion
net profit (revised from $16 billion) recorded in 2010.
On expected revenues of $598 billion, a $4 billion profit equates to
a 0.7 percent 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. 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 percent margin, there is little buffer left against further
shocks,” IATA’s Director General and CEO Giovanni Bisignani said.
Fuel: 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 percent 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 percent 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
percent of airline costs-more than double the 13% 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” Bisignani said.
This fuel price spike is substantially different from the one that
occurred in 2008. First, while oil inventories are low, there is
substantial spare OPEC and refinery capacity, which was not the case
three years ago.
Second, the monetary expansion that fuelled a surge in financial
investments in commodities is ending, which will remove a major upward
pressure on fuel prices.
Nonetheless, volatility in the fuel prices remains one of the
industry’s major challenges.
Demand: Despite high energy prices, world trade and corporate
earnings continued to improve. As a result, global GDP projections
increased by 0.1 percentage points to 3.2 percent, which is supporting
continued growth in demand for air transport.
However, growth rates for both cargo and passenger markets have been
revised downward because of higher fuel costs. Passenger demand is now
expected to grow 4.4 percent over the year, a full 1.2 percentage points
below the 5.6 percent previously forecast in March. Similarly, cargo
demand is expected to increase 5.5 percent and not 6.1 percent as
predicted earlier. The number of price-sensitive leisure travellers has
fallen 3 to 4 percent over the past five months, as travel costs were
forced higher by fuel prices and, in Europe, by new passenger taxes.
Less price-sensitive premium travel demand has been more robust in
the face of rising prices and continues to be driven by growing world
trade and business investment.
Premium passenger growth has dipped from the 9 percent of 2010, but
is expected to be close to the historical trend this year at a 5-6
Capacity: Overall capacity (combined passenger and cargo) is
expected to expand 5.8 percent, which is above the 4.7 percent
anticipated increase in demand. The gap between capacity and demand
growth has widened to 1.1 percentage points from 0.3 percentage points
in the previous forecast.
Due to schedule commitments and fixed costs, capacity adjustments are
expected to continue lagging behind the fall in demand, driving load
By April, passenger load factors were hovering around 77 percent.
This is more than a full percentage point below the 78.4 percent
achieved for international traffic in 2010.
Aircraft utilization is also falling. This decline in asset
utilization, represented by lower load factors and average hours flown
per aircraft, is the most significant downward pressure on airline
Yields: Robust economic conditions have given airlines some
scope to partially recover higher fuel prices. This is reflected in an
increased yield growth forecast of 3 percent for passenger traffic
(double the previously forecast 1.5 percent) and 4 percent for cargo (up
from the previously forecast 1.9 percent).
The problem is that higher travel costs are now weakening
price-sensitive demand and airlines are not expected to be able to
offset higher costs with increased revenues.
Risks: The key risk to this outlook is a weakening of global
economic growth. High energy prices will certainly have a slowing impact
on economic growth. However, the impact will be mitigated by two
First, while high oil prices previously triggered recessions, today’s
economies (which generate a unit of GDP using just half the energy
required in the mid-1970s) are less sensitive. Second, the corporate
sector is cash-rich, business confidence is high, and world trade
continues to expand at around 9 percent annually. The International
Monetary Fund and others have raised global growth projections, which
would indicate a recovery in demand growth to the historical 5.6 percent
level for the second half of 2011.
IATA’s forecast for continued, albeit lower, airline profits despite
$110 a barrel oil prices, is dependant on a strong economy to generate
sufficient revenues to partially offset higher fuel costs.