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Aviation Body Foresees Turbulent 2012

by Ulrika Lomas, Tax-News.com, Brussels

12 December 2011


The International Air Transport Association (IATA) has projected that airlines will generate a profit of USD6.9bn this year, although industry profits are expected to fall to USD3.5bn in 2012, from USD4.9bn previously forecast, mainly as a result of the crisis in the eurozone.

Publishing preliminary year-end results, IATA reported that while profitability has remained steady towards the end of 2011, regional differences have widened reflecting the very different economic environment facing airlines in different parts of the world.

European carriers are facing the most challenge position in 2012, IATA has said, with higher passenger taxes and weak home market economies having limited profitability in Europe. The region's carriers are expected to generate a collective profit of just USD1bn, down from the previous forecast for 2011 of USD1.4bn. This profitability has come despite European airlines being one of the fastest growing regions in terms of traffic this year. Yields have suffered and there is a greater risk of a decline from 2011's high traffic volumes as Europe's sovereign debt crisis escalates.

IATA has reported that North American carriers are in a much more benign environment. They have seen load factor improvements (a measure of capacity utilization) as a result of tight capacity management, which has improved profitability to USD2bn (up from the previous forecast of USD1.5bn). The US economy has also grown at a faster pace than Europe. Nonetheless, the bankruptcy filing of American Airlines indicates that the region faces intense competitive challenges as well.

Asia-Pacific carriers also saw stronger though varied trading conditions. IATA reported that Japan’s domestic market still has not fully recovered from the March earthquake and tsunami, and load factors remain under pressure. By contrast airlines have improved load factors and profitability on China’s expanding domestic market. IATA has therefore upgraded its previous forecast for 2011 profitability by USD800m to a USD3.3bn profit. This is the largest absolute profit among the regions.

Middle East carriers are expected to see profits of USD400m (down from the previously forecast USD800m) as high fuel costs squeezed profit margins on the more price sensitive long-haul traffic connecting over Middle Eastern hubs.

In a similar pattern Latin American profits will see a downgrade to USD200m (from the previously forecast USD600m). Performance has been mixed across the region with much of the IATA's downgrade attributed to the impact of intense competition and falling load factors on Brazil’s domestic market.

African carriers are still expected to break-even. New trade lanes with Asia are developing and markets within the continent are reflecting the improvement in economic development in many African economies. However, competition has been fierce and the region’s airlines have struggled to keep load factors at profitable levels, IATA reported.

At a global level, passenger demand is expected to have expanded by 6.1%, stronger than the 5.9% forecast of September.

Stringent management of load factors has enabled aircraft to overcome worse-than-expected cargo performance; and somewhat higher-than-anticipated oil prices. At an average oil price of USD112 per barrel, the industry's 2011 fuel bill is expected to be USD178bn (up USD2bn from previous expectations) against revenues of USD596bn.

Looking ahead to 2012, IATA noted that the ongoing sovereign debt crisis being experienced in the eurozone could heavily affect carriers' performance. In a worst case scenario, should the eurozone crisis evolve into a full-blown banking crisis and European recession, IATA estimates that industry losses could exceed USD8bn - the largest since the 2008 financial crisis.

TAGS: aviation

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