Oil prices cut airline profits by half

THE International Air Transport Association (IATA) downgraded its airline industry outlook for 2011 to US$8,6 billion from the US$9,1 billion it estimated in December 2010. This is a 46% fall in net profits compared to the US$16 billion (revised from US$15,1 billion) earned by the industry in 2010. On expected industry revenues of US$594 billion, the US$8,6 billion 2011 profit equates to a net profit margin of 1,4%.

“Political unrest in the Middle East hassent oil over US$100 per barrel. That is significantly higher than the US$84 per barrel that was the assumption in December. At the same time the global economy is now forecast to grow by 3,1% this year, a full 0,5 percentage point better than predicted just three months ago. But stronger revenues will provide only a partial offset to higher costs. Profits will be cut in half compared to last year and margins are a pathetic 1,4%,” said Giovanni Bisignani, IATA’s Director General and CEO.

IATA raised its 2011 average oil price assumption to US$96 per barrel of Brent crude (up from US$84 in December), in line with market forecasts. Including the impact of fuel hedging, which is roughly 50% of expected consumption, this will increase the industry fuel bill by US$10 billion to a total of US$166 billion. Compared to levels in 2010, oil prices are now expected to be 20% higher in 2011. Fuel is now estimated to represent 29% of total operating costs (up from 26% in 2010).

“This year the industry is performing a balancing act on a very thin tight-rope of a 1,4% margin. It is a structural problem that the industry has faced with an average margin of just 0,1% over the last four decades. There is very little buffer for the industry to keep its balance as it absorbs shocks. Today oil is the biggest risk. If its rise stalls the global economic expansion, the outlook will deteriorate very quickly,” said Bisignani.

African carriers are expected to break even. This is unchanged from the previous forecast, but down from the US$100 million profit that the region posted in 2010.

Strong economic and transport demand growth on the back of foreign direct investment and rapidly growing trade links with Asia is keeping the region’s carriers out of the red. However, they face intensifying competition from Middle Eastern carriers and others for lucrative business traffic.

IATA also highlighted the risk of increasing taxation, particularly in price sensitive leisure markets. In 2010, the industry saw new and increased taxes in the range of 3-5% of ticket prices in the UK, Germany and Austria. Recently, Iceland, India and South Africa have joined with plans for additional taxation.

“This is a price sensitive business. Aviation has the power to stimulate economies, but that ability is being compromised by adding taxes at a time when we are struggling to cope with high fuel prices just to maintain anaemic margins,” said Bisignani.