Airline Profits To Fly Higher Than Expected: IATA

on December 13 2012 12:10 PM
Delta Airlines 757
The global airline industry will fly higher than expected in 2012, with the latest forecast from IATA showing profits considerably larger than previous estimates. Delta

The global airline industry will fly higher than expected in 2012, with the latest forecast showing profits considerably larger than previous estimates.

The International Air Transport Association, or IATA, announced its upward revision on Thursday, saying airlines would return a profit of $6.7 billion in 2012, up from the $4.1 billion forecast in October. This figure is expected to grow to $8.4 billion in 2013, slightly better than the previous estimate of $7.5 billion. The IATA, whose 240 airlines carry 84 percent of all passengers and cargo, said the industry net post-tax margin, however, would remain weak at 1 percent in 2012 and 1.3 percent in 2013.

Despite rising fuel prices and a slowing global economy, the industry’s profits and cash flows held up to levels similar to those in 2006 when oil prices were about $45 lower per barrel and growth was much higher at 4 percent.

“With GDP growth close to the ‘stall speed’ of 2 percent and oil at $109.5/barrel we expected much weaker performance. But airlines have adjusted to this difficult environment through improving efficiency and restructuring. That is protecting cash flows against weak economic growth and high fuel prices,” stated Tony Tyler, IATA’s director general and CEO.

Tyler said large airlines improved their performance the most, averaging earnings of between 10 and 15 percent.

“It’s a diverging picture. Economies of scale are helping larger airlines to cope much better with the difficult environment than small and medium-sized carriers, which continue to struggle,” he noted.

More robust international trade in goods and services meant a year of strong passenger growth at 5.3 percent, though the IATA emphasized that, despite the improved prospects, overall the industry remains weak. Its $6.7 billion expected net profit estimate is a drop from the $8.8 billion the industry made in 2011, and the $15.8 billion it earned in 2010. Moreover, the 1 percent net profit margin is far below the 7 percent to 8 percent needed to recover the industry’s cost of capital.

The Geneva-based global trade group nevertheless believes recent alliances and joint ventures have enabled economies of scale and offered more choices for passengers, thus improving airline financial performance. Several bankruptcies and the lack of new entrants also contributed to an improved industry structure, it said.

Overall, North American carriers led the way with an expected collective net profit of $2.4 billion and an earnings before interest and taxes margin of 3.4 percent in 2012. European and African carriers are forecast to break even, while Asia-Pacific, Latin American and Middle East airlines can expect net profits of between $400 million and $3 billion.

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