The world’s airlines have seen a remarkable switch in fortunes in the past three months, as global air traffic demand recovers more strongly than expected. IATA has revised its outlook for the airline industry from a loss of USD2.8 billion (predicted in Mar-2010) to a profit of USD2.5 billion. It all comes down to a boost to the passenger and cargo demand projections, now +7.1% for passenger (previously +5.6%) and +18.5% for cargo (previously +12.0%), better yields (thanks to good capacity management) and no change to the oil price forecast (of USD79 per barrel).
Industry revenues are forecast to be USD545 billion in 2010, up USD23 billion (or 4.4%) from the previous forecast and some 12.8% above the USD483 billion generated in 2009. However, industry revenues are still below pre-crisis levels. The industry reported revenues of USD564 billion in 2008.
IATA’s Director General and CEO, Giovanni Bisignani, stated, “the global economy is recovering from the depths of the financial crisis much more quickly than could have been anticipated. Airlines are benefiting from a strong traffic rebound that is pushing the industry into the black. We thought that it would take at least three years to recover the USD81 billion (14.3%) drop in revenues in 2009. But the USD62 billion top line improvement this year puts us about 75% on the way to pre-crisis levels”.
But Mr Bisignani added the revised outlook comes with some “important health warnings”, noting it represents a net margin of just 0.5%, “which is a long way from sustainable profitability”. “Second, a major part of the global industry is still posting big losses. A stagnating economy, strikes, natural disasters, and a currency crisis have left European carriers struggling with an anticipated USD2.8 billion loss,” said Bisignani.
IATA forecast highlights comparing to previous forecast for 2010 (USD)
|March Forecast||June Forecast|
|Revenues||$522 billion||$545 billion|
|Passenger demand growth||5.6%||7.1%|
|Cargo demand growth||12.0%||18.5%|
|Fuel cost||$132 billion||$140 billion|
|Net Profit||-$2.8 billion||+$2.5 billion|
|Net % margin||-0.5%||+0.5%|
“Significant improvement” in yields – no structural change for premium travel
Yields are now forecast to grow by 4.5% for both the cargo and passenger business. This is a “significant improvement” from the previously forecast yield growth of 2.0% in passenger markets and 3.1% for cargo, according to IATA, “but the rate is just ahead of consumer price inflation”.
Encouragingly for the full service airline business model, IATA declared that premium demand now appears to be recovering cyclically in many regions, alongside improvements in global trade, putting to rest earlier fears that the financial crisis would result in a structural change to the premium market.
Premium travel was rebounding at an annualised growth rate of 20% over the first quarter and economy travel is now back to pre-recession levels. IATA observed, “in the absence of a strong improvement in consumer confidence that would be needed to drive leisure traffic growth, it would appear that business travel also supported some of the recovery in the economy cabin”.
New capacity will be added to the global system as a result of the 1,340 aircraft that are scheduled to join the fleet in 2010. Of these, approximately 500 are replacement aircraft while the rest will be new capacity. Latent capacity is also present as a result of reduced long-haul fleet utilisation which remains several percentage points below pre-crisis levels. Over the year, IATA expect’s an average demand improvement of 10.2% (passenger and cargo) to be met with a 5.4% increase in capacity. “This will support load factors which remained near record levels for most of the first quarter”, stated the industry body.
Regional differences: Europe still in the red
IATA stated the recovery has been “asymmetrical”, with worsening conditions in Europe in sharp contrast to improvements in all other regions.
Net profits by region (USD billion): 2009 and 2010
The following are IATA’s thumbnail outlooks for the regions:
Carriers continue to benefit from strong regional growth. Against a global GDP growth expectation of 2.9%, the Asian economy (excluding Japan) is expected to grow by 7% this year. China will outpace that with an expected 9.9% GDP expansion. As a result, the region’s carriers are expected to deliver the largest profit at $2.2 billion. This is more than double the previously forecast $900 million in March and a major reversal from the $2.7 billion loss in 2009.
Carriers are expected to return a profit of $1.9 billion. This is a major reversal from the previously forecast $1.8 billion loss, and the $2.7 billion that the region’s carriers lost in 2009. The US economy is growing with a 3.3% GDP expansion. Carriers are improving efficiencies as a result of demand growth, capacity cuts and domestic mergers.
Carriers will show a profit of $900 million, up slightly from the $800 million previously forecast. Having posted a $500 million profit in 2009, Latin America will be the only region to post two consecutive years of profit. The region’s commodities are closely linked with Asian growth and supported by a 3.9% GDP expansion this year.
Carriers are expected to post a profit of $100 million—their first since 2005. This is significantly better than the previously forecast $400 million loss and the $600 million that the region’s carriers lost in 2009. GDP growth of 4.3% is outstripping the global average and Gulf carriers continue to gain market share through their hubs for Europe to Asia-Pacific traffic even as capacity is being added at a more cautious rate.
Carriers are expected to post a $100 million profit, their first since 2002. This reverses the $100 million loss previously forecast in March and the $100 million that the region lost in 2009.
Europe will be the only region in the red with a $2.8 billion loss. This is a downgrading from the $2.2 billion loss previously forecast in March, although it is an improvement on the $4.3 billion that the region lost in 2009. GDP growth of 0.9% is not enough to support a recovery and the currency crisis clouds the future with uncertainty. Moreover, 70% of the $1.8 billion loss in revenue as a result of the volcanic ash crisis was borne by European carriers. A series of labor strikes and strike threats have also impacted the region’s performance.
New faces on the IATA “Wall of Shame”. German travel tax could be next
Bisignani took aim at labour (describing it as “out of touch with reality”,) European ANSPs (which were added to the IATA Wall of Shame) and Western GDS providers (described as “leeches” on the industry).
Bisignani called on labour groups to “come down to earth, stop picketing and cooperate”, noting airlines “cannot pay salary increases with our USD47 billion in losses".
He stated that the 19 European ANSPs increased their costs by USD413 million, adding that regulated performance targets “must replace the cost recovery model”. He also described Airports Company South Africa as a “national embarrassment” by increasing its bill to airlines by USD1.2 billion over the next five years.
On the distribution providers, Mr Bisignani stated western GDSs “are leeches charging at least USD4 per transaction, when China’s TravelSky does it for just USD1.20”. He added, “on top of that, they sell you [airlines] your data with a seven-digit price tag - that is pure profit. BASTA!” He issued a warning that IATA would “break their monopoly on your data with a cost-effective solution”.
Bisignani also took aim at governments, calling on them to refrain from applying further tax increases on the sector, instead “directing them at the banks starting with their billion-dollar bonus pots”.
German Chancellor Angela Merkel yesterday unveiled plans to impose a tax on air travel as part of a four-year austerity plan to reduce the budget deficit. The levy, to be paid by passengers departing from German airports, with the level depending on factors such as the flight’s noise level and fuel consumption, will raise EUR1 billion p/a. The levy would be replaced by a Europe-wide measure once aviation is subject to European Union carbon- emissions trading.
Outlook: more hard work to be done
IATA stated that seeing black on the bottom line is a “great achievement”, underscoring the resilience of the industry, which has been “strengthened by a decade of cost cutting, restructuring and re-engineering processes”.
Mr Bisignani concluded, “even with all of our hard work, the result is just a 0.5% margin that does not even cover our cost of capital. The industry is fragile. The challenge to build a healthy industry requires even greater alignment of governments, labour, and industry partners. They must all understand that this industry needs to continue to reduce costs, gain efficiencies and be able to restructure itself if it is to be sustainably profitable. We must all be prepared for a greater change”.