FINANCIAL FORECAST

September 2011

WEAK ECONOMIES MEAN WEAK AIRLINE PROFITS
The economic outlook has deteriorated since the June update of our forecast for airline industry profits. However, air travel expanded more strongly than expected during the first half of this year and airlines managed to restore asset utilization during the second quarter. The net impact of these factors has been to limit the deterioration in airline profits that we forecast for this year, but to extend the period of weak airline profitability into 2012. We now expect airline industry net post-tax profits to total US$6.9 billion in 2011 (was $4 billion), after the $16 billion achieved in 2010. In our first look at the 2012 outlook we conclude that it will be a year of sluggish growth and weak profits, with net profits forecast at $4.9 billion.
World economic growth and airline profit margins 6% 7% World economic growth

5%

6%
5%

Net post-tax profits as % revenues

4% 3% 2% 1%

World GDP growth

4% 3% 2%

Source: ICAO, IATA, EIU

-1% -2% -3% 1% Net posttax profit margin 0% -1% -2% -3% 1970 1975 1980 1985 1990 1995 2000 2005 2010

-4%
-5% -6%

The financial performance of the airline industry is closely linked to the health of world economies. If economic growth is strong airlines can cope with high fuel prices. But whenever world economic growth has slowed below 2% the airline industry has suffered losses. The weaker economic outlook is taking growth perilously close to that 2% rate. We forecast weak airline profits to continue into 2012.
2010 2011F 2012F EBIT margin, % revenues 4.0% 2.5% 2.0% 4.7% 1.9% 6.0% 3.6% 5.0% 1.6% 3.0% 1.5% 2.9% 3.0% 3.4% 0.7% 2.4% 0.8% 2.8% 2.9% 3.1% 0.2% 2010 2011F 2012F Net profits, $ billion 15.8 6.9 4.9 4.1 1.9 8.0 0.9 0.9 0.1 1.5 1.4 2.5 0.8 0.6 0.0 1.2 0.3 2.3 0.7 0.5 -0.1

System-wide global commercial airlines Global Regions North America Europe Asia-Pacific Middle East Latin America Africa

Source: ICAO data 2009-10. IATA estimates for regions in 2010 and forecast for 2011-12. Note: ICAO have substantially revised 2008 and 2009 data. Their recently released 2010 global data replaces IATA's estimate.

IATA Economics www.iata.org/economics

1

In fact airlines managed to restore passenger load factors back to 2010 highs during the second quarter and. billion 390 370 RPKs 15 Source: IATA 350 FTKs 330 310 14 13 12 290 270 2007 2008 2009 2010 2011 11 AIRLINES RESTORE ASSET UTILIZATION IN Q2  One of the drags on 2011Q1 profitability was the slump in asset utilization.6 8. Total air travel and air freight volumes 430 410 Seasonally adjusted Source: IATA  17 16 RPKs per month.9 7. However. With new aircraft being delivered at a rate of 100 a month and older aircraft being brought out of storage. since the end of the business inventory cycle reduced the need for shippers to get product to market quickly.iata. We had expected a second upward leg to the air freight recovery.org/economics . Passenger load factor and aircraft utilization 8. Yields rose in line with expectations which. so far this year there has been no further expansion in world trade and air freight has continued to show no sign of any revival.8 7. at least for single aisle aircraft.org/ fuelconsulting 75% Single aisle aircraft utilization 74% 73% Source: IATA.0 7. for the passenger business. together with stronger volumes.4 seasonally adjusted 80% Passenger load factor 79% Average daily hours flown 8. better asset utilization added to stronger revenues to produce better than expected Q2 profits. In the second half of 2010 world trade was expanding strongly but. This now looks unlikely to materialize until 2012. despite the demand shocks hitting Japan and MENA at the end of the first quarter. Partially offsetting this encouraging development was the continued stagnation of air freight markets.6 2007 2008 2009 2010 2011 78% Improve profitability through fuel efficiency consulting % ASKs 77% Q2 76% www. we had expected that decline to be the start of a trend. with falls in both load factors and aircraft hours. meant first half passenger revenues were stronger than looked likely in June. and weak economic growth in Q2.7 7.2 8.1 8. Freight utilization was much softer but. But since air freight represents around 12% of airline revenues. surface transportation met the increase in demand.iata. the better performance of the passenger business more than offset the weakness of freight.September 2011 Industry Financial Forecast AIR TRAVEL VOLUMES UNEXPECTEDLY STRONG  In the year to July air travel volumes (measured by RPKs) were over 6% higher than they were the previous year. billion FTKs per month.3 8. Boeing 2 IATA Economics www.5 8. late-2010 utilization rates were restored.

there are likely to be major variations by regions.5 2011-12 forecasts.7 11. Includes pax and cargo by weight.2 -1. despite reasonable first half growth in travel.9 1.September 2011 Industry Financial Forecast BUT KEY DRIVERS OF DEMAND ARE WEAKER  The passenger business did better than expected in the first half of the year.2 8.3 1.4 2.5 2008 2009 2010 2011F 2012F Capacity (ATK).2 4.4% in 2010 to 4.7 -2. Business confidence and world trade Seasonally adjusted Business confidence (left scale) 60 140 135 130 55 50 125 Source: JP Morgan/ Markit. European airlines achieved strong growth in 2011 on international markets but the very weak economic outlook for this region is expected to limit growth in Europe next year.6 9. Netherlands CPB 45 World trade (right scale) 120 115 110 40 35 105 100 2007 2008 2009 2010 2011 30  Business confidence in the manufacturing sector of the major economies has fallen from a level consistent with robust economic growth at the end of the first quarter to just above the 50-level of the index.6 5.8 9. which indicates that purchasing managers expect growth to stop.5 5. 2008 2009 2010 2011F Traffic (TKP). from early 2009 through to the end of last year. Growth prospects also remain relatively strong in Latin America and the Middle East.0 7.9 -5. Combining passenger and cargo markets in the table above shows that markets slowed from growth of 10.8 -5.4 -6.0 8. But overall the outlook is for weak confidence to produce weak demand for air transport.1 6.5 6.8 15.9 2. Given these developments the stagnation of air freight markets is unsurprising.6 2. IATA 2010 estimates.6 0.5 4.2 1.1 -5.4 0.5 5.1  System-wide global commercial airlines Global Regions North America Europe Asia-Pacific Middle East Latin America Africa Source: ICAO data to 2009.7 4. In contrast we expect a solid rebound in the traffic carried by Asia-Pacific airlines.2 5.6 2012F 4.0 14.1 -3. But since our June forecast update some of the key drivers for the outlook have deteriorated significantly.2 3.6 -4.7 5. Non-Japan Asia is forecast to continue to expand at a strong pace.5%.  This year. The Japanese economy is expected to rebound from earthquake damaged levels this year.9 -7.6 9.2 3. Deliveries of new aircraft and some older aircraft being brought out of storage are expanding the number of seats in the fleet at an 3   IATA Economics www.4 -0.4 5. % change over year 0. North America is slow because of the maturity of the market and the limited capacity additions planned.2 12. With world economic growth (aggregated using market exchange rates) forecast to remain weak at 2. What is more surprising is the strength of air travel into the early part of Q3. albeit considerably down on the pace of the post-recession period.2 -2.3 0.3 4. traffic.8 3.5 20.7 8.5 3.7 -4.1 9. there has been no further expansion in overall export and import volumes worldwide since the start of this year. After a strong post-recession rebound. particularly on cargo markets.1 3.4 4. Capacity has expanded faster than demand in 2011.org/economics . Our analysis suggests this is partly due to business travel generated by business confidence earlier in the year.6 8.7 3.7 4.iata.3 7.6 8. Travel was also boosted by a rise of consumer confidence in economies such as China which may be more durable.9 7.8 6. This driver is now likely to weaken air travel.4 15. there has been a halving of the growth in air transport market volumes. At the same time world trade has stopped growing. Dom. However.0 3.3 10. -2.6% this year.4% in 2012 we are only expecting sluggish growth in traffic of 4.and int.5 9. % change over year 1.4 2.3 9.3 1.

0 3.1 -4.518 4.0 1.9 0.9 0.7 2003 322 5.8 System-wide global commercial airlines REVENUES.8 60.0 Net post-tax losses (right scale) -20 -25 -30 -9.5 64.1 -4.0 0.9 37.7 0.3 -14.0 2010 547 14.7 294 47 14. Some slippage in load factors is likely.0 1.1 -1.6 -5.4 1.0 318 38.3 62.0 2006 465 12.833 1.1 65.0 2.9 2.2 2.8 2.8 4.0 0 -5 US$ billion Identify profitable new markets using IATA’s business intelligence tools Try it today! Airlines www. % Weight load factor achieved.7 -9.4 -7.6 7. millions World economic growth. the outlook for the airline industry is also for an extended period of sluggish growth and weak profits. Note ICAO have substantially revised 2008-09 financial data.1 -1.2 -26.0 323 4.9 0.5 -2.3 76. % Sched passenger numbers.7 444 63 1. $ billion % margin NET PROFIT.4 493 70 4.5 365 53 5.6 2009 476 -16.9 333 38.792 8.9 125 26 62.9 4.3 2004 379 17.5 -1. IATA some 2010 estimates and 2011-12 forecast.9 6.1 4. % OPERATING PROFIT.2 2.2 2.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F Source: IATA.7 -1. tkp.0 126.1 29.5 2005 413 9.5 238 38 1.8 61. $ billion % change Passenger Cargo Traffic volumes Passenger growth.4 2.6 74. % Cargo yield % EXPENSES. For European airlines the very weak home markets that are forecast for 2012 will produce a challenging environment.6 -1.4 2.8 3.1 63.1 270 38. $/b Jet kerosene price.7 311 39.org/paxis Airports.4 1.4 46.4 -4.2 63.4 2.3 0.5 311 -2. including non-ICAO states.1 15.9 63.3 0.0 4.0 2.0 620 6.8 34.0 3.org/airportis -3.1 117 26 65. $ billion % change Fuel % of expenses Crude oil price.8 2.507 -1.7 9.7 35.5 3.2 249 40 2.5 7.8 44. At the other end of the spectrum stronger Asian economies and intra-region travel and trade flows should enable Asia-Pacific airlines to sustain their profitability through 2012.8 2.org/economics 4 .9 3.0 2.9 71. millions Cargo growth.0 62.9 0.1 81.5 1.9 2.0 90.4 21.7 45.7 78.3 61. OUTLOOK IS FOR WEAK PROFITABILITY OVERALL  Debt-burdened Western economies look set for an extended period of weak economic growth.4 571 16.9 425 66 7.1 2. Passenger and freight numbers are global system-wide collected by IATA.8 -0.3 65.4 1.2 48.4 42.5 6.8 71. % Passenger load factor achieved.8 -2.7 382 41. % Passenger yield.0 579 10. despite trade and other linkages to the West.211 0.4 77.9 62. but we expect that to be more difficult to achieve in 2012.957 4. The fourth quarter of this year and early 2012 may well see the weakest point of markets.2 62.9 60.9 -5. 2002 306 -0.2 5.4 176 30 110.1 76. tkp.September 2011 Industry Financial Forecast annualized pace of around 6-7%.0 EBIT margin (left scale) 20 15 3.7 2.9 14. Consultants www.9 1.8 40.5 2.4 63.6 -11.4 -0. IATA Economics www.4 2.4 61.7 279 38. Brent.3 1.8 5.8 -1. $ billion % margin Source: ICAO data to 2009-10.4 91.iata.3 -3.5 71. because the majority of air transport markets are still linked to developed economies.9 91 22 54.0 -1.479 -9.6 399 59 6.849 3.7 5.0 44 14 28.7 464 67 5.1 3.7 4.7 139 26 79.8 47.5 73.0 1.8 135 28 73.6 76.1 323 48 7.iata.064 7.8 2.2 474 -16.9 77.5 2. Developing economies look in much better shape.4 376 16.4 3.4 409 8. Their recent 2010 financial data replaces IATA’s estimate.0 7.325 4.6 -1.iata.9 201 32 100.6 -2.8 63.3 49.3 61.1 2007 510 9.9 450 10.5 189 33 99.2 63. Growth opportunities will continue in those markets but.1 349 39.681 18.0 -10 -15 -6.9 13.6 2.0 45.1 60.7 19. Global commercial airline profitability 6.2 14.3 -4.3 2. So far passenger capacity has been held in line with traffic growth.1 15.2 65 17 38.9 2008 570 11.1 -0. % Freight tonnes.0 525 10.7 40 13 25.8 6.0 15.8 -2.0 71.0 115.0 355 39.0 126.9 2011F 594 8.0 -14. ICAO  Airline performance will depend partly on how its own or its alliance network is exposed to these growth markets.0 419 40. $/b Non-Fuel cents per atk (non-fuel unit cost) % change Break-even weight load factor.1 62.4 386 41.5 490 8.9 41.5 374 48 -2.0 78. or worse.7 2.0 10 5 % revenues 0.6 5.5 403 41.2 2012F 632 6.2 63.

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