In January, IATA forecasted net profit for the global airline industry for 2012 of US$3.5 billion. Director General Tony Tyler commented at the time that “given the strong headwinds of high oil prices and economic uncertainty, remaining in the black would of itself be a great achievement for airlines”. Following a downgraded profit forecast in June 2012 of US$3 billion for the year, IATA is now slightly more upbeat in their September 2012 forecast – upgrading net profit for the year to US$4.1 billion, following better than expected performance by airlines.
Announcing the upward revision, Tyler emphasised that “we should not get too excited” – this is a US$1.1 billion upward revision in profits against global revenues of US$636 billion, so represents a net profit margin increase of only 0.1%. Tyler said the upward revision in the forecast profit “means that airlines are keeping their heads above water better than we thought in a very difficult operating environment”. He attributes the reasons for this to steps taken by airlines to restructure their businesses, cut costs, improve processes, and invest in more fuel efficient aircraft. He also points to the better survival ratio of airlines as evidence that industry consolidation over recent years has strengthened many airlines’ business models.
The fact that oil prices, although reasonably volatile, have remained in line with the expectations in the June 2012 forecast – at around the US$110 per barrel mark – has helped, but Tyler points out that just a few years ago, turning a profit with oil prices over US$100 per barrel would have been unthinkable.
Although airlines are managing to deliver profits in these difficult times as a result of their own stronger operational performance, with marginal growth in passenger volumes and yields, improved performance across the industry is by no means uniform.
Asia-Pacific airlines are expected to be the best performers over the year, making a US$2.3 billion profit – some US$300 million better than forecast - with demand for regional and long haul travel on the increase, and Chinese domestic demand still growing at nearly 10% despite a slowdown in the Chinese economy.
Middle Eastern airlines have also seen a major upturn in their prospects with profits projected to rise from US$400 million to US$700 million for the year – driven largely by growth in their long-haul business, with increasing market share on routes connecting via the Gulf hubs.
North American airlines have shown the greatest improvements since June, with projected profits of US$1.9 billion – some US$500 million better than the projected out-turn in the June 2012 forecast. This improvement has been driven largely by a trimming of capacity, bringing higher load factors and improved yields. It is too early to forecast what the impact of Hurricane Sandy will be on US carriers’ financials.
Latin American carriers are also expected to improve their profitability through to the end of the year but the forecast profit of US$400 million remains unchanged.
African carriers are expected to break even – an improvement over the June 2012 forecast.
European airlines are in the weakest position, with a further increase in losses predicted from US$1.1 billion in June to US$1.2 billion for the year end. They are still being buffeted badly by those “economic headwinds” to which Tony Tyler referred, but Tyler also points to some issues specific to Europe: “Not only is the economy weak with the Eurozone crisis, Europe has some very unfriendly conditions for doing business – onerous regulations, high taxes, insufficient capacity at many key airports and an air traffic management system badly in need of modernisation.”
The tough operating environment may see more European carriers going under in 2012 and further merger and consolidation among airlines in the next 6-12 months. With the European Commission now scrutinising closely the circumstances in which state aid is given under the 2004 EU Rescue and Restructuring Guidelines, mid-sized European carriers in financial difficulties may have no alternative other than to look to mergers, or to sell stakes in themselves to foreign investors in order to survive. However, the appetite for investment and further acquisitions among the three big European network carrier groups, Air France KLM, International Airlines Group (IAG) and Lufthansa, has waned considerably while they are restructuring their own short-haul operations. This leaves the field wide open – perhaps for the Gulf carriers – for opportunistic acquisitions.