The International Air Transport Association’s publication of its December Premium Traffic Monitor completes its cycle of reporting for 2012. In this analysis, we review the full range of IATA’s regular data and statistics to summarise the current state of the global airline industry. We also provide IATA’s timetable of forthcoming updates.
Total passenger traffic has recovered well from the global financial crisis and has seen two years of growth close to long term trend rates, although IATA sees this slowing in 2013. Premium traffic has seen its share of total passenger numbers fall from 9.5% in 2007 to 8% by the end of 2012. Cargo traffic has seen two years of negative growth and is below pre-crisis levels, but is forecast to return to modest positive growth in 2013. Passenger yields are forecast to flatten off after three years of growth reflecting modest capacity expansion, while cargo yields are forecast to fall once again.
IATA expects airline industry net profit to increase from an estimated USD6.7 billion in 2012 to USD8.4 billion in 2013. This cautious optimism is supported by its latest quarterly survey of airline business confidence, but its forecast might need to be revised downwards if recent jet fuel price increases hold through the year.
Scrutiny over Delta’s controversial decision earlier in 2012 to purchase an oil refinery located south of Philadelphia, Pennsylvania will be revived in the coming days as the idle facility prepares to restart production at the end of Sep-2012. With the rapid run-up in jet fuel prices during the last 60 days Delta’s latest efforts to combat fuel price volatility will be closely watched by its competitors and the greater energy industry at large to determine if the carrier’s carefully constructed gamble to control fuel costs pays off.
As the start of full-scale production approaches, Delta’s enthusiasm for the project continues to grow as it aims to seek to alleviate the alarmingly rising rate of crack spreads, which during 2011 accounted for roughly 18% or USD2.2 billion of the carrier’s total USD12 billion fuel costs.
In spite of high oil prices and a Europe-wide economic recession Ryanair further distanced itself from its full service peers and reported a remarkable 25% increase in net profit for FY2011/12 to a record EUR503 million. Operating profit lifted 40% year-on-year to EUR683.2 million. Much to the annoyance and envy of Lufthansa and certainly Air France-KLM Group, which both recorded a deterioration of their financial performance in the most recent financial year, Ryanair improved its net margin by 1ppt to 12% and was able to maintain its operating margin at 14%. This is well above the EBIT margin performance of Europe’s full service carriers. Air France-KLM’s operating margin was negative in FY2011 while Lufthansa Group’s adjusted operating margin came in a 3% and IAG’s operating margin also reached a meagre 3%.
A combination of high oil prices, regional political instability, volatile exchange rates and Emirates’ exposure to the global economic situation has brought the carrier back towards its international peers. Emirates reported a net profit of AED1.5 billion (USD409 million) in FY2011-2012, a dramatic 72.1% drop on the previous year’s result.
Even with the stiff headwinds pushing against it during the year, the carrier continued undaunted with its growth strategy. In FY2011-2012, Emirates took delivery of 22 new widebody aircraft and added 11 new destinations – a record number of new routes for the airline in a single financial year. It flew 34 million passengers at an 80% passenger load factor and increased its overall passenger traffic (revenue passenger kilometres) by just under 10%. Emirates now connects 122 destinations on six continents from its hub in Dubai.
Overall, revenue at the airline reached AED61.5 billion (USD16.7 billion), an increase of 16.5% from the previous year. Passenger revenue climbed 18.2% year-on-year, to AED49 billion (USD13 billion) due to the overall expansion of passenger numbers and flying, as well as higher fares.
Global outlook for 2012:
• A year of uncertainty and challenges in prospect, with risks galore;
• Fuel costs harm profitability across the industry, also threat the viability of some models; meanwhile high oil prices restrain demand;
• Europe’s economic problems and bank lending caution will suppress demand – and encourage European airlines to relocate capacity outside the region;
• Middle East and Asian airlines continue to spread their wings globally, rapidly shifting the balance of power;
• Across the world, pressures to merge will intensify;
• There is potential for rising protectionism, even trade wars, in stagnant markets such as Europe and the US;
• Employees’ “concession fatigue” provokes industrial unrest as cutbacks continue;
• Asia, the Middle East and Latin America continue to grow, but profitability declines as yield profiles are diluted and structural change accelerates.
Latin American carriers entered 2012 with mixed fortunes as two of its major players, Brazil’s Gol and TAM, posted losses for 2011 and started the year off reining in their capacity to bolster a yield recovery that started in 2H2011. A USD52 million loss at LAN’s Colombian subsidiary also pressured LAN’s overall profits as the group’s net income fell 24%. Both Copa and Aeromexico turned strong performances last year, and remain confident of continuing their positive momentum in 2012 as the economies of Panama and Mexico continue to grow. But similar to many previous occasions, fuel costs are ushering in a level of uncertainty surrounding Latin America this year.
The global aviation industry could report losses of USD5.3 billion in what is set to be another tough year in 2012 amid weak global GDP growth and rising fuel costs. Average oil prices could reach as high as USD135/bbl in 2012, according to IATA’s ‘oil spike’ forecast for 2012. However, the industry body’s ‘central forecast’ outlines an expected profit decline from USD3.5 billion to USD3 billion in 2012 for an “anemic” 0.5% profit margin, based on fuel prices at USD115/barrel. However, the forecast marks an improvement from the ‘banking crisis’ forecast provided in Dec-2011 of a potential USD8.3 billion loss.
These latest observations from IATA are yet another reminder of the fragility of the aviation business. Its exposure to myriad externalities and uncertainties make sustained profitability difficult.
2011 was not an easy year for Royal Jordanian. After its net profit dropped by two thirds in 2010, the airline had been anticipating a year of modest profit in 2011. However, the regional unrest across the Middle East and North Africa, as well as the European economic downturn and the increasing price of fuel, struck the carrier a hard blow in the year.
Over the year, the carrier suffered four consecutive quarterly losses. It reported a full year loss of JOD57.8 million (USD81.4 million). This is its heaviest ever annual loss, more than wiping out the profits Royal Jordanian managed to make in 2009 and 2010.
The airline temporarily halted services to Libya, Iraq, Iran and Egypt during the early months of 2011, although the unrest cut revenues by just 2% according to CEO Hussein Dabbas. European traffic was affected given the continent’s general economic weakness.
Even before the NATO air strikes, the United Nations sanctions and the European Union ban, Libya’s aviation industry had little hope. The country, ruled by Muammar Gaddafi under an iron fist for the last 40 years, placed little focus on its airlines and airports, while countries in the nearby Middle East flourished and started to develop some of the largest hubs in the world. The Middle East/North African region has become increasingly important but it seems Libya was left behind, and when major unrest broke out in Feb-2011, the industry’s problems widened significantly. Now Libya has been “liberalised” and Gaddafi killed, it must begin the slow process of rebuilding an industry whose foundations were not strong to begin with. International airlines have resumed services, investment firms are showing interest in relaunching airport renovation projects, the country’s two national carriers have relaunched operations and are set to resume talks on their merger, and tourism operators are becoming optimistic about future bookings.
Inspired by the Tunisian and Egyptian revolutions, the unrest in Libya is part of the greater Arab Spring, which has seen the leaders of Egypt, Tunisia and now Libya overthrown. Aviation in these countries during the unrest was unstable, however, Tunisair and EgyptAir have successfully restored operations to full capacity. In Feb-2011, Cairo International Airport recorded 530,000 passengers – a 54% drop from Feb-2010. The airport is now operating at near-2010 capacity, and in Jul-2011 and Sep-2011, passenger traffic surpassed 2009 levels. Libya’s Monastir Habib Bourguiba International Airport and Enfidha Zine El Abidine Ben Ali Airport, both operated by TAV Holdings, have been recording consistent traffic decreases of between 30% and 50% each month.
It has been said that if Uganda’s infrastructure were to be improved, its resources could feed the entire African continent. Instead, the nation is one of the poorest and least developed countries in the world. However the potential for further development is undeniably present, and this is what has drawn large international airlines to enter the market. British Airways, Emirates, EgyptAir, KLM and South African Airways have been in the market for years, but it is the entry of Middle Eastern carriers such as Gulf Air and Qatar Airways in Oct-2011 through Dec-2011 that is boosting the nation’s aviation standing.
The country’s main international airport in Entebbe expects to break 1.5 million passengers in 2011 due to these services and is undergoing extensive improvement work to attract more carriers. The Ugandan Government approved the right for foreign investors to develop the airport, which will likely see a consortium of Middle Eastern developers take interest. The country’s designated national carrier, Air Uganda, is improving its offering as well, and is on course to launch domestic and more international services under its turnaround business plan.
Singapore Airlines struggles to defend yields as fuel costs blow out and 'protracted' downturn looms
Singapore Airlines (SIA) faces a bleak outlook for its fiscal second half as fuel prices remain high and yields are at risk of dropping further due to the challenging economic conditions Europe. SIA mainline yields dropped 1% in the quarter ending 30-Sep-2011 (2QFY2011/12) despite the increase in fuel prices, suggesting passenger yields have peaked in the current cycle some 9% below pre-GFC levels in 2QFY2008/09.
In speaking to analysts during the group's 2QFY2011/12 earnings briefing, SIA CEO Goh Choon Phong warned the market conditions currently facing the carrier are in some respects more challenging than FY2008/09. “I think we are looking at a much more protracted type of economic issues now in Europe where we actually do not see any finality at least in how it’s going to go. So it is a protracted situation ... we might have to bear with it for perhaps a longer time than the last one,” Mr Goh said.
Ryanair, the world’s largest airline by international passenger numbers, raised its full-year profit target by 10% to EUR440 million, as higher yields are expected to offset stubbornly high fuel prices. The carrier reported a 20% increase in adjusted profit after tax in 1HFY2012 (six months ended Sep-2011), bucking the industry trend, and amid strong performance in passenger, yields and top line revenue (including ancillary) growth.
Ryanair CEO Michael O’Leary stated the carrier expects 2HFY2012 yields to increase by 14%, more than the previously forecast 12% growth. Supporting the anticipated yield improvement, capacity will be reduced by 4% in the second half to safeguard profitability over the low season amid stubbornly high fuel costs. The decision is expected to result in a 10% reduction in passenger numbers, equating to a reduction of 500,0000 passengers in Nov-2011, as up to 80 aircraft are grounded. "Grounding 80 aircraft means we can hang on to higher fares," Mr O’Leary said.