Eurozone crisis biggest risk to airline profits

The International Air Transport Association (Iata) has announced revisions to its industry outlook. In 2011 profitability has remained weak but unchanged at $6.9 billion for a nett margin of 1.2%. Looking ahead to 2012, Iata downgraded its central forecast for airline profits from $4.9 billion to $3.5 billion for a nett margin of 0.6%.
The Eurozone crisis puts severe downside risk on the 2012 outlook. This is illustrated by the recently published Organisation for economic Co-operation and development (OECD) economic outlook.

Should the Eurozone crisis evolve into a full-blown banking crisis and European recession, Iata estimates that the global aviation industry could suffer losses exceeding $8 billion in 2012.

“The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the Eurozone sovereign debt crisis. Such an outcome could lead to losses of over $8 billion—the largest since the 2008 financial crisis,” said Tony Tyler, Iata Director General and CEO.

“The global forecast for 2011 is unchanged at $6.9 billion. But regional differences have widened, reflecting the very different economic environments facing airlines in different parts of the world. And the overall margin of 1.2% tells you just how difficult the battle for profitability in this business is,” he continues.
All regions are expected to show profit deterioration from 2011. However, the regional differences in 2012 are stark:

•    European carriers are expected to fall into losses of $600 million, hit by the weakness of their home market economies and further increases in passenger taxes.
•    North American carriers are expected to generate profits of $1.7 billion, maintaining the strongest EBIT margin of 2.4%, as limited capacity growth is providing some protection against the downward pressure on profits.
•    Asia-Pacific carriers are expected to deliver the largest absolute profit at $2.1 billion. This is weaker than 2011’s performance but the deterioration is limited by high load factors on markets such as China, where the increases in demand are structural and to some extent shielded from the cycle.  
•    Middle East carriers are expected to post a $300 million profit, less than half the previously forecast $700 million profit, as long-haul market conditions deteriorate, in particular those linked to the weak European economies.
•    Latin American carriers will see profits decline to $100 million—a $400 million negative swing from the previous forecast, partly a carry-over from the recent weakness of profitability in the large Brazil market.
•    African carriers will fall into losses of $100 million, unchanged from the previous forecast.  Economies and air transport markets continue to grow in the region, but load factors are not expected to be strong enough to offset the impact of weaker yields on profitability.

“Even our best-case scenario for 2012 is for a nett margin of just 0.6% on revenues of $618 billion. But the industry is really moving at two speeds with highly taxed European carriers headed into the red,” concluded Tony.