Airline industry 2011 outlook downgraded amid high oil price

The International Air Transport Association (IATA) on March 2 downgraded its airline industry outlook for 2011 to $8.6 billion from the $9.1 billion it estimated in December 2010.

This is a 46% fall in net profits compared to the $16 billion (revised from $15.1 billion) earned by the industry in 2010. On expected industry revenues of $594 billion, the $8.6 billion 2011 profit equates to a net profit margin of 1.4%.

“Political unrest in the Middle East has sent oil over $100 per barrel. That is significantly higher than the $84 per barrel that was the assumption in December," said Giovanni Bisignani, IATA’s Director General and CEO. "At the same time the global economy is now forecast to grow by 3.1% this year—a full 0.5 percentage point better than predicted just three months ago. But stronger revenues will provide only a partial offset to higher costs. Profits will be cut in half compared to last year and margins are a pathetic 1.4%,” he added.

IATA raised its 2011 average oil price assumption to $96 per barrel of Brent crude (up from $84 in December), in line with market forecasts. Including the impact of fuel hedging, which is roughly 50% of expected consumption, this will increase the industry fuel bill by $10 billion to a total of $166 billion. Compared to levels in 2010, oil prices are now expected to be 20% higher in 2011. Fuel is now estimated to represent 29% of total operating costs (up from 26% in 2010).

Growing economies give airlines the opportunity to recover some of these added costs with additional revenues. For example, since early 2009, rising oil prices added 25% to unit costs while average fares (excluding surcharges) rose 20%. But in 2011 higher revenues are not expected to be sufficient to prevent the rise in oil prices from causing profits to shrink by 46% from 2010 levels.

An increase in global GDP forecasts to 3.1% (from 2.6% in December) bodes well for continuing strong demand for air transport. In line with this, IATA revised its passenger demand growth forecast to 5.6% (from 5.2%) and its cargo growth forecast to 6.1% (up from 5.5%). Overall, this will generate a 5.7% expansion in tonne kilometers flown.

Asia-Pacific carriers are expected to deliver the largest collective profit of $3.7 billion and the highest operating margins of 4.6%. This is down substantially from the $7.6 billion that the region’s carriers made in 2010 and from the previously forecast $4.6 billion for 2011. While the strong economic growth in the region is still driving profitability, inflation fighting measures in China are slowing trade and air cargo demand. The key reason for the downgrade from December’s forecast is that the region is more exposed to higher fuel prices, due to relatively low hedging on average.