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Global Air Industry Doing Better than Expected

The International Air Transport Association (IATA) has revised its 2010 industry outlook and is now projecting a profit of $8.9 billion (up significantly from the $2.5 billion forecast in June). However, in its first look into 2011, IATA estimates that profitability will drop to $5.3 billion.

“The industry recovery has been stronger and faster than anyone predicted,” says Giovanni Bisignani, IATA’s director general and CEO. “The $8.9 billion profit that we are projecting will start to recoup the nearly $50 billion lost over the previous decade. But a reality check is in order. There are lingering doubts about how long this cyclical upturn will last. Even if it is sustainable, the profit margins that we operate on are so razor thin that even increasing profits 3.5 times only generates a 1.6% margin. This is below the 2.5% margin of the previous cycle peak in 2007 and far below what it would take just to cover our cost of capital.”

The improved outlook for 2010 is being driven by a combination of factors. On the revenue side increasing demand and disciplined capacity management are leading to sharply stronger yields pushing revenues higher. At the same time, costs remain relatively stable.

The revised outlook maintains an average full-year crude oil price of $79/barrel. However, excess refinery capacity is pushing the “crack spread” slightly lower than previously anticipated resulting in lower prices for jet fuel. Even with stronger traffic the total fuel bill is now forecast to be $137 billion, $3 billion lower than forecast in June. Fuel continues to account for about 25% of industry costs.

The industry outlook grows weaker in 2011. The impact of the post-recession bounce from re-stocked inventories will dissipate. Consumer spending is not expected to pick-up the slack as joblessness remains high and consumer confidence falls in Europe and North America. Travel and freight markets will remain stronger in regions such as Asia, the Middle East and South America but IATA does not expect these hot spots to be able to sustain global growth in 2011.

Slower growth is expected to keep costs in check and oil prices are expected to remain constant at $79/barrel. Industry growth is expected to fall back to 5%, in line with the historical trend. But a surge of aircraft deliveries (1400) will fuel capacity expansion of 6%—in excess of expected demand improvements. Falling load factors will remove the possibility for further yield improvement leading to a more challenging revenue environment.

“This year (2010) is as good as it gets for this cycle,” says Bisignani. “Governments are running out of cash for pump priming. Unemployment remains high and business confidence is weakening. And we expect the 3.2% GDP growth of 2010 to drop to 2.6% in 2011. As a result, 2011 is looking more austere. We see profitability falling to $5.3 billion with a margin of 0.9%.”

IATA (International Air Transport Association) represents some 230 airlines comprising 93% of scheduled international air traffic.

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