Profit forecasts for European airlines downgraded

The 2012 profit forecast for the global airline industry was maintained on Monday, according to the International Air Transport Association (IATA), though the airline body has significantly cut its forecasts for European carriers as the Eurozone crisis continues to take its toll on companies' bottom lines.

The IATA, which represents 240 airlines accounting for 84% of global air traffic, said that global industry profits are still expected to be $3.0bn, unchanged from its last estimate in March, as falling oil prices are outweighed by a subdued economic environment.

"A fall in oil prices, stronger than expected growth in passenger traffic and a bottoming out of the freight market are driving some improvements in the profitability outlook. However, this is offset by the continued and deepening European sovereign debt crisis, which has led markets to expect a further deterioration and damage to economic growth, the adverse impact of which has been built into this forecast," the IATA said.

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Oil prices are expected to average $110 a barrel in 2012, compared with an earlier forecast of $115. "Even with this price softening, fuel is still expected to account for 33% of airline operating costs, the same as in 2008 when oil prices spiked," the report said.

While the $3.0bn industry profit forecast has not changed, "almost everything in the equation has," according to the IATA's Director-General and Chief Executive Officer, Tony Tyler. "Demand has been better than expected, so far this year. And fuel prices are now lower than previously anticipated, but that's on the expectation of economic weakness ahead. The Eurozone crisis is standing in the way of improved profitability and we continue to face the prospect of a net profit margin of just 0.5%."

Global profits peaked at $15.8bn in 2010 with a net profit margin of 2.9%, dropping to $7.9bn and a 1.3% net profit margin in 2011. This year's net profit margin is expected to be just 0.5%.

Carriers in North America and Latin America are the only ones expected to perform better than the March forecast, while the outlook for those in Africa is unchanged. However, estimates for European, Asia-Pacific and Middle-Eastern carriers have been downgraded.

European airlines alone are expected to report a collective loss of $1.1bn, compared with March's estimate of a $600m loss, as demand growth slows to 2.3% from 6.7% in 2011.

"Some major European economies are already in recession (Spain and the United Kingdom) and it is anticipated that economic weakness will spread further during the course of the year as the Eurozone crisis deepens. Concurrently, European carriers continue to be hit by high and rising tax regimes, inefficiencies in air traffic management, and the high cost of complying with poorly thought-out regulations," the IATA said.

BC