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| Flights Sector Outlook |
The global
airlines sector outlook is showing a little dimmer picture with profit margin forecasts being slashed. The International Air Transport Association (IATA) further downgraded its 2011 airline industry profit forecast to just $4 billion which is significantly lower than the last years stats. This would be around 54% fall in profit as compared with the $8.6 billion profit forecast in March 2011 and a 78% drop compared with the $18 billion net profit (revised from $16 billion) recorded in the year ending 2010. The total expected revenues is $598 billion, a $4 billion profit equates to jus 0.7% margin. The operating profit margin is seeing many pressures with rising fuel costs and increasing competition being some of them. Also there have been external constraints such as the Japenese Tsunami and various political upheavals.
The Airlines Industry Forecast Highlights:
Fuel Costs: The cost of fuel is held as the primary cause of reduced profitability for the airlines sector. The average oil price for 2011 is now expected to be $110 per barrel (Brent price), a 15% increase over the previous forecast of $96 per barrel. For each dollar increase in the average annual oil price, airlines face an additional $1.6 billion in costs. With estimates that 50% of the industry’s fuel requirement is hedged at 2010 price levels, the industry 2011 fuel bill will rise by $10 billion to $176 billion. Fuel is now estimated to comprise 30% of airline costs—more than double the 13% of 2001.
Demand for airlines not increasing very fast: Despite high energy prices, world trade and corporate earnings continued to improve. As a result, global GDP projections increased by 0.1 percentage points to 3.2%, which is supporting continued growth in demand for air transport. However, growth rates for both cargo and passenger markets have been revised downward because of higher fuel costs. Passenger demand is now expected to grow 4.4% over the year, a full 1.2 percentage points below the 5.6% previously forecast in March. Similarly, cargo demand is expected to increase 5.5% and not 6.1% as predicted earlier.
The number of price-sensitive leisure travelers has fallen 3–4% over the past five months, as travel costs were forced higher by fuel prices and, in Europe, by new passenger taxes. Less price-sensitive premium travel demand has been more robust in the face of rising prices and continues to be driven by growing world trade and business investment. Premium passenger growth has dipped from the 9% of 2010, but is expected to be close to the historical trend this year at a 5–6% rate.
Capacity Enhancement: Overall capacity (combined passenger and cargo) is expected to expand 5.8%, which is above the 4.7% anticipated increase in demand. The gap between capacity and demand growth has widened to 1.1 percentage points from 0.3 percentage points in the previous forecast. Due to schedule commitments and fixed costs, capacity adjustments are expected to continue lagging behind the fall in demand, driving load factors down. By April, passenger load factors were hovering around 77%. This is more than a full percentage point below the 78.4% achieved for international traffic in 2010. Aircraft utilization is also falling. This decline in asset utilization, represented by lower load factors and average hours flown per aircraft, is the most significant downward pressure on airline profitability.
Yields: Robust economic conditions have given airlines some scope to partially recover higher fuel prices. This is reflected in an increased yield growth forecast of 3% for passenger traffic (double the previously forecast 1.5%) and 4% for cargo (up from the previously forecast 1.9%). The problem is that higher travel costs are now weakening price-sensitive demand and airlines are not expected to be able to offset higher costs with increased revenues.
Risks: The key risk to this outlook is a weakening of global economic growth. High energy prices will certainly have a slowing impact on economic growth. However, the impact will be mitigated by two factors. First, while high oil prices previously triggered recessions, today’s economies (which generate a unit of GDP using just half the energy required in the mid-1970s) are less sensitive. Second, the corporate sector is cash-rich, business confidence is high, and world trade continues to expand at around 9% annually. The International Monetary Fund and others have raised global growth projections, which would indicate a recovery in demand growth to the historical 5.6% level for the second half of 2011. IATA’s forecast for continued, albeit lower, airline profits despite $110 a barrel oil prices, is dependant on a strong economy to generate sufficient revenues to partially offset higher fuel costs.
Regional Highlights
Asia-Pacific Airlines
Asia Pacific airlines carriers are expected to earn around $2.1 billion and it is the largest profit earning group among all the regions. But still it has been impacted by the same forces that affects other region but two developments are in its favor. First very High demand for Airlines Tickets and second the cargo market is also on the rise. Though the forecasts is dramatically down from the $10 billion profit that the region achieved in 2010. Airlines in this region are more exposed than others to cargo markets and fuel price fluctuations. Asia-Pacific airlines carry 40% of all air freight volumes, while low labor costs and relatively low hedging means fuel accounts for a bigger proportion of total costs. In addition, the Japanese earthquake and tsunami are expected to dent the region’s prospects for the remainder of the year. However, this will be more than offset by robust growth in both China and India. The continued dynamism of these economies means that Asia-Pacific is the only region where demand increases (6.4%) are expected to outpace capacity growth (5.9%). Here again India and China are the driving force with the Emergence of major airlines such as
Jet Airways,
Kingfisher airlines, Cathay Pacific,
Hainan airlines and others such as
Air India. Tourists demands are also rising in India and China.
North America
North American Airlines carriers will see the $4.1 billion profit of 2010 fall to $1.2 billion. The region’s carriers are being hit on the cost side by rising fuel prices, exacerbated by an older, less fuel-efficient aircraft fleet. The region is also taking a hit on the demand side with 12% of international revenues linked to the Japan market. This is being offset somewhat by a stronger than expected US economy and stronger inbound demand and exports fueled by the weak US dollar. Careful capacity management is expected to see an overall demand increase of 4% balanced by an equal increase in capacity.
Europ Airlines Outlook
European Airlines carriers will deliver a $500 million profit, down from $1.9 billion in 2010. The sovereign debt crisis is dampening demand from the peripheral European economies. Core economies are benefiting from strong exports, but new and increased taxation of passengers is damaging price-sensitive demand. Much of the profit forecast for this year is expected to be generated on more buoyant long-haul markets. A capacity increase of 4.8% is expected to outstrip demand growth of 3.9%.
Middle east Airlines
Middle East carriers will deliver a $100 million profit, down from $900 million in 2010. Political unrest in parts of the middle easy region is hurting the airlines booking demand. The major airlines in the region such as
Emirates airlines,
Etihad airlines,
Air Arabia and Middle East airlines are expected to continue to win market share on long-haul markets, flying passengers via Middle Eastern hubs. However, high fuel costs will weaken demand from key passenger segments and asset utilization will be under downward pressure. Capacity growth of 15.5% is expected to outstrip demand expansion of 14.6%.
Latin American Airlines
Latin American carriers will be the only region to deliver a third consecutive year of profits. The regional economies continue to show good growth, and trade links with the United States and Asia in particular are boosting traffic. Innovative business models and consolidation have combined to generate reasonable profits from these growing markets. But a $100 million profit is down considerably on the $900 million profit of 2010. Capacity growth of 6.9% will outstrip the 6% increase growth in demand. African carriers are forecast to be the only region to post a loss, $100 million, in 2011. Political unrest across Northern Africa is dampening demand, particularly in Egypt and Tunisia, which have proportionately large tourism industries. Economies and air transport demand in many African countries have grown strongly but the local industry has struggled to turn this into profitable growth, hampered by poor infrastructure and restrictive government regulation. To compound the problem, capacity growth of 7.4% will outstrip demand growth of 6.5%.
Airline Sector Broad Trends: Analysis
The forecast point to the following Broad Trends
1. The airlines in future will continue to operate on lower profit margins
2. Alliances: The airlines will continue to form groups or enter into alliances to reduce the expenditure on various sectors
3. The Asia pacific will be the region for airlines expansion and it remains to be seen how the competition plays out in the long run.
4. The corporate and tourist sector will see the most Growth over time
