IATA forecasts a meager $4b profit for airlines worldwide in 2011

This is a 78% fall from the $18 billion that the airlines made in 2010.

According to a release, On anticipated revenues of $598 billion, this translates to a net industry margin of 0.7%. Based on a forecast average oil price of $110/barrel for 2011 and a jet fuel price of $126.5/barrel, the industry fuel bill is expected to be $176 billion which accounts for 30% of costs.

The International Air Transport Association (IATA) announced traffic results for June which showed a slight softening in demand for both air travel and freight markets. Compared to June 2010, passenger demand was up 4.4% while freight demand was 3% lower.

The trend for passenger travel remains upwards, but at a slower pace than the post recession rebound which was at an annual rate close to 10%. The slowdown reflects slower economic growth and increased costs resulting from higher jet fuel prices, and increased taxation (in some countries).

Freight volumes have not grown since July-August 2010. May 2010 was the post-recession re-stocking peak, compared to which the June 2011 international freight market was 6% smaller. While world trade is expanding at 7% a year, the benefit is being realized more by modes of transport other than air.

“Compared to May both passenger and cargo markets contracted by about 1%. For passenger traffic, this is a speed-bump in a gradual post recession improvement. But air cargo continues in the doldrums at 6% below the post-recession peak,” said Tony Tyler, IATA’s Director General and CEO.

Overall demand for international passenger services grew by 5.9% and capacity expanded by 7.2%. While load factors were maintained at an impressive 79.0%, this is 0.9 percentage points below the June 2010 performance.

International Passenger Markets

Asia Pacific carriers saw demand grow by 3.3%. Demand growth was held at about half the global average due to tightening economic policies and the effects of the earthquake and tsunami in Japan. The weakness in Japan’s international market has knocked 0.5% percentage points off the region’s growth. Asia Pacific carriers recorded a load factor of 76.9% which is 2.1 percentage points below the global average.

Freight (Domestic + International)

Asia Pacific carriers, the biggest players in the air freight market with a 40.5% market share, also recorded the largest year-on-year decline (-5.8%). This is mainly attributable to (1) disrupted supply chains for the electronics and auto industries in the wake of the Japanese tsunami and earthquake and (2) slower economic growth in China. The strength of the region however is shown in the maintenance of the highest load factors (58.6%) well ahead of the 45.7% industry average for the month.

The Bottom Line
“The industry is living in several different realities. With high load factors and an upward growth trend, the passenger business is doing better than cargo. But regional growth patterns are shifting. The Middle East carriers have moderated to a single digit expansion and tighter economic conditions have slowed China’s growth.

Meanwhile, Latin America is leading the industry expansion followed by Europe which is growing strongly despite its currency crisis. And North America is underperforming the industry on growth but leading on load factors,” said Tyler.

“What is clear is that the rising jet fuel price is putting pressure on the bottom line. The average price for the second quarter was $133/barrel which is an increase of $10 over the first quarter. With an expected profit margin of only 0.7%, the ability of airlines to recoup this cost is critical to staying in the black for the year. Slower economic growth makes these challenges all the more difficult. It is certainly not the time to burden the industry with increases in other costs, including taxation,” said Tyler.

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