Asia-Pacific carriers expected to make largest contribution to industry profits

The International Air Transport Association (IATA) released its revised industry outlook for 2012 yesterday. Asia-Pacific carriers are expected to make the largest contribution to industry profits ($2.0 billion), even with a $0.3 billion downgrade from the previous outlook, due to the weak first quarter performance.

This is less than half the $ 4.9 billion profit that the region delivered in 2011 and a quarter of the $ 8 billion achieved in 2010. Asian carriers make up about 40% of the global air cargo business and the weakness of this market in 2011 was the reason why there was a large decline in the region's profits.

There has been little sign of the region's airlines benefiting from the modest upturn in cargo markets this year. The slowdown in the Chinese and Indian economies is another factor in the slow growth environment. Nevertheless, the region will benefit from stronger growth in aggregate passenger and cargo traffic this year, as a result of the rebound in demand in the Japan market following the tsunami and earthquake last year. Regional demand is expected to grow at 3.9%, above the anticipated 3.3% growth in capacity, providing some protection to airline profits.

The Middle East carriers are expected to post profits of $0.4 billion, down from the March projection of $0.5 billion. This is a significant drop compared with 2011, when the region's carriers returned a profit of $1 billion. The weakness of European originating traffic will damage long-haul markets, but Middle East airlines continue to lead the industry on growth. Along with capturing long-haul passenger traffic through the Gulf hubs, they have been the beneficiary of 80% of the improvement in cargo markets during the past six months. Overall, capacity by the region's carriers is expected to expand by 13.3%, behind the 14.1% growth in demand.

Global industry profits are expected to be $3 billion, unchanged from the last update in March. A fall in oil prices, stronger than expected growth in passenger traffic and a bottoming out of the freight market are driving some improvements in the profitability outlook.

This will be the second year of declining returns since airline profits peaked in 2010 at $15.8 billion with a net profit margin of 2.9%. In 2011, industry profits fell to $7.9 billion for a 1.3% net profit margin. This year's projected $3 billion industry profit would yield a net profit margin of just 0.5%.

"The $3 billion 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%," said Tony Tyler, IATA's Director General and CEO.