High oil prices cut airline profits nearly 50 percent

by Array

Geneva: The International Air Transport Association (IATA) has downgraded its 2011 airline industry outlook to $8.6 billion from the $9.1 billion  estimated in December 2010. That’s a 46-percent fall in net profits compared to $16 billion in 2010. On expected industry revenues of $594 billion, the $8.6 billion profit in 2011 equals a net profit of 1.4 percent.

“Political unrest in the Middle East has sent oil over $100 per barrel,” said Giovanni Bisignani, IATA’s director general and CEO. “That’s significantly higher than the $84 per barrel that was the assumption in December. At the same time, the global economy is now forecast to grow by 3.1 percent this year—a full 0.5 percentage point better than predicted just three months ago.”

Stronger revenues will provide a partial offset to higher costs, Bisignani noted, with profits cut in half compared to last year.

Among the IATA forecasts for 2011 are:

  • oil prices are expected to jump 20 percent this year, while growing economies will allow airlines to recover some added costs with additional revenues. For example, since early 2009, rising oil prices added 25 percent to unit costs while average fares (excluding surcharges) rose 20 percent. In 2011, higher revenues are not expected to be sufficient to prevent the rise in oil prices from causing profits to shrink;
  • an increase in global GDP forecasts to 3.1 percent (from 2.6 percent in December) bodes well for continuing strong demand for air transport. The IATA has revised cargo growth forecasts to 6.1 percent (up from 5.5 percent);
  • published airline schedules indicate a capacity increase of six percent, slightly lower than the 6.1 percent previously forecast. Of this, five percent will come from the 1,400 new aircraft in 2011;
  • capacity is expected to increase by six percent in 2011 and demand by 5.7 percent, narrowing from the previously forecast gap of 0.8 percent. Freight load factors are high compared to previous cyclical peaks. Cargo yields are expected to grow by 1.9 percent (up from the previous forecast of no growth); and
  • in terms of risk, oil is the biggest contributor in the industry. Oil prices are currently driven by speculation on the Middle East’s political scene, rather than on economic growth.

The IATA also highlighted the risk of increasing taxation. In 2010, the industry saw new and increased taxes on ticket prices in the UK, Germany and Austria. As well, Iceland, India and South Africa have plans for more tax.