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Profits Peak For Aviation In 2010

by Ulrika Lomas,, Brussels

22 September 2010

The International Air Transport Association (IATA) has revised upwards its 2010 industry outlook, and is now projecting a profit of USD8.9bn for the industry, up from the USD2.5bn forecast in June. Profitability from 2011 however is expected to fall.

Commenting, Giovanni Bisignani, IATA’s Director General and CEO, said:

“The industry recovery has been stronger and faster than anyone predicted. The USD8.9bn profit that we are projecting will start to recoup the nearly USD50bn lost over the previous decade. But a reality check is in order. There are lingering doubts about how long this cyclical upturn will last. Even if it is sustainable, the profit margins that we operate on are so razor thin that even increasing profits 3.5 times only generates a 1.6% margin. This is below the 2.5% margin of the previous cycle peak in 2007 and far below what it would take just to cover our cost of capital.”

The improved outlook for 2010 is being driven by a combination of factors. On the revenue side increasing demand and disciplined capacity management are leading to sharply stronger yields pushing revenues higher. At the same time, costs remain relatively stable.

The latest profitability report shows:

  • Demand: Rapidly improving demand has pushed traffic 3-4% above the pre-crisis levels of early 2008. Demand in 2010 is expected to grow by 11% (stronger than the previous forecast of 10.2%) while capacity will only expand by 7.0% (up from the previous forecast of 5.4%).
  • Yields: Yield improvements are the most important factor driving the improved outlook. On top of last year’s capacity cuts, capacity expansion is lagging behind demand improvements. The result is higher load factors and some pricing power for airlines. More business travelers on premium seats are also boosting average yields. Yields are now expected to grow by 7.3% for passenger and 7.9% for cargo. This is sharply higher than the 4.5% previously projected for both. Even with this improvement, yields are still 8% below the pre-crisis levels of 2008.
  • Revenues: Revenues are expected to grow to USD560bn, USD15bn more than previously forecast. This is only slightly below the USD564bn in revenues achieved in 2008 when the previous economic cycle peaked and prior to the start of the financial crisis.
  • Fuel: The revised outlook maintains an average full-year crude oil price of USD79/barrel. However, excess refinery capacity is pushing the “crack spread” slightly lower than previously anticipated resulting in lower prices for jet fuel. Even with stronger traffic the total fuel bill is now forecast to be USD137bn, USD3bn lower than forecast in June. Fuel continues to account for about 25% of industry costs.

While all regions except Africa have improved prospects in the IATA's latest figures compared to the previous forecast, sharp differences remain:

  • Asia-Pacific carriers are expected to post a USD5.2bn profit. This is better than the USD3bn recorded during the previous peak in 2007 and double the previously forecasted USD2.2bn;
  • The prospects for Europe’s carriers have improved markedly since June from a loss of USD2.8bn to a loss of USD1.3bn;
  • North American carriers are now forecast to make USD3.5bn (up from USD1.9bn);
  • Latin American carriers are expected to now achieve marginally higher profits than forecasts earlier from USD900m to USD1bn;
  • Middle Eastern carriers are expected to see their profits rise significantly from USD100m to USD400m; meanwhile,
  • African airlines’ profits are expected to remain unchanged from the previous forecast, USD100m.

IATA has said that the industry outlook looks weaker for 2011: “Consumer spending is not expected to pick-up the slack as joblessness remains high and consumer confidence falls in Europe and North America. Travel and freight markets will remain stronger in regions such as Asia, the Middle East and South America but we do not expect these hot spots to be able to sustain global growth in 2011. Slower growth is expected to keep costs in check and oil prices are expected to remain constant at USD79/barrel. Industry growth is expected to fall back to 5%, in line with the historical trend, but a surge of aircraft deliveries (1,400) will fuel capacity expansion of 6% — in excess of expected demand improvements. Falling load factors will remove the possibility for further yield improvement leading to a more challenging revenue environment.

Concluding, Bisignani said: “2010 is as good as it gets for this cycle. Governments are running out of cash for pump priming. Unemployment remains high and business confidence is weakening. We expect the 3.2% GDP growth of 2010 to drop to 2.6% in 2011. As a result, 2011 is looking more austere. We see profitability falling to USD5.3bn with a margin of 0.9%.”

TAGS: aviation

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