Eurozone crisis to hurt airline industry

In a statement, IATA said that the crisis puts severe downside risk on the 2012 outlook as illustrated by the recently published OECD economic outlook. In a worst case scenario, should the Eurozone crisis evolve into a full-blown banking crises and European recession, it estimates that the global aviation industry could suffer losses exceeding $8 billion in 2012.

For 2011, profitability remains weak but unchanged at $6.9 billion for a net margin of 1.2 per cent.

“The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the Eurozone sovereign debt crisis. Such an outcome could lead to losses of over $8 billion—the largest since the 2008 financial crisis,” said Tony Tyler, IATA’s Director General and CEO.
 
IATA expects passenger demand to grow by 4 per cent (down from previously forecast 4.6 per cent), while cargo is expected to show flat growth (down from the previously forecast 4.2 per cent expansion).
Passenger and cargo yields are expected to remain flat in 2012. While this is unchanged for cargo, passenger yields were previously forecast to grow by 1.7 per cent.
Fuel costs are relatively unchanged from the previous forecast at $198 billion. That is based on oil at $99 per barrel (against a previous forecast of $100 per barrel).
Industry revenues are expected to grow by 3.7 per cent to $618 billion. This will be outstripped by cost increases of 4.5 per cent to $609 billion.
 
European carriers are expected to fall into losses of $600 million, hit by the weakness of their home market economies and further increases in passenger taxes.
North American carriers are expected to generate profits of $1.7 billion, maintaining the strongest EBIT margin of 2.4 per cent, as limited capacity growth is providing some protection against the downward pressure on profits.
Asia-Pacific carriers are expected to deliver the largest absolute profit at $2.1 billion. This is weaker than 2011’s performance but the deterioration is limited by high load factors on markets such as China, where the increases in demand are structural and to some extent shielded from the cycle. 
Middle East carriers are expected to post a $300 million profit, less than half the previously forecast $700 million profit, as long-haul market conditions deteriorate, in particular those linked to the weak European economies.
Latin American carriers will see profits decline to $100 million—a $400 million negative swing from the previous forecast, partly a carry-over from the recent weakness of profitability in the large Brazil market.
African carriers will fall into losses of $100 million, unchanged from the previous forecast.  Economies and air transport markets continue to grow in the region, but load factors are not expected to be strong enough to offset the impact of weaker yields on profitability.
 
“Even our best case scenario for 2012 is for a net margin of just 0.6 per cent on revenues of $618 billion. But the industry is really moving at two speeds with highly taxed European carriers headed into the red,” Tyler said.

In this scenario, all regions would fall into losses. Europe would be expected to post the deepest losses at $4.4 billion, followed by North America at $1.8 billion and Asia-Pacific at $1.1 billion. The Middle East and Latin America would both be expected to post $400 million losses, while Africa would be $200 million in the red.

This scenario is based on global GDP growth falling to 0.8 per cent in 2012 driven by Europe descending into deep recession. Historically, GDP growth rates below 2.0 per cent have resulted in the airline industry producing a net global loss. In this scenario, airlines would see growth in passenger demand grind to a halt and a 4.7 per cent contraction in cargo markets. Both passenger and cargo yields would fall by 1.5 per cent.

Some relief in the fuel price would be expected. Based on oil at $85 per barrel, the fuel bill would be $183 billion and consume 31 per cent of costs. However, overall expenses would be expected to grow by 1.9 per cent (compared to 2011) to $592 billion. Revenues would see a fall of 1.3 per cent (compared to 2011) to $589 billion. The net result would be an $8.3 billion loss and net margin of minus 1.4 per cent.

 In 2011, European carriers are by far in the most challenging position. Higher passenger taxes and weak home market economies have limited profitability in Europe. The region’s carriers are forecast to generate a collective profit of just $1.0 billion in 2011, down from the previously forecast $1.4 billion, and an EBIT margin of 1.2 per cent.
Asia-Pacific carriers also saw stronger though varied trading conditions. Japan’s domestic market still has not fully recovered from the March earthquake and tsunami, and load factors remain under pressure. By contrast airlines have improved load factors and profitability on China’s expanding domestic market. We have upgraded our forecast for the region by $800 million to a $3.3 billion profit. This is the largest absolute profit among the regions.