Forecasts 2011: Airlines - Asia leads the way

After profitability returned in 2010, airlines' ability to keep hold of it depends a lot on their region. The mixed picture, in which carriers in emerging markets in Latin America, the Middle East and, in particular, Asia prosper while Europeans struggle, seems set to continue.

But after the 2010 bounce-back, flattening yields, slowing revenue growth and rising oil prices could cap profit growth for everyone. And the debt recovery efforts of many developed economies seem set to make it another tough year in Europe.

STRONG RECOVERY

The International Air Transport Association estimates that the industry will post net profits of $9.1 billion in 2011. This tops the $5.3 billion profit it forecast three months ago as the 2010 recovery continued to exceed expectations. This has been so strong that IATA now expects a record $15.1 billion profit for 2010.

But there is a caveat. Today's profit levels come with lower margins. Operating margins should exceed 5% for 2010, but net margins are likely to be less than 3% and are expected to slip to 1.5% in 2011.

© Singapore Airlines

Central to the outlook is the belief that revenue growth will slow while fuel costs are on the rise. IATA expects passenger and cargo traffic to grow by about 5% in 2011, far slower than this year's bounce-back.

Capacity, which IATA says will outstrip traffic growth at 6% in 2011, and economic difficulties will affect yields.

"In the last couple of quarters, capacity has returned largely because airlines are using their fleet more productively," says IATA chief economist Brian Pearce, noting that this helped lift passenger yields.

"But in Europe and North America, capacity is coming in as demand starts to slow down and those economic conditions that were very good for profitability are starting to decrease. Already, yields are flattening and we do not think we will see much of an increase in yields [in 2011]."

Mixed fortunes in 2010 saw Asia-Pacific carriers, aided by the strong cargo recovery, driving growth. The region's airlines contributed more than half of industry profits. By contrast, European carriers battled the region's slow recovery, although, after a better-than-expected third quarter, IATA now sees them at least in profit for 2010. IATA again expects Asia to be the mainstay of industry profits in 2011, while those in Europe will only scrape into profit. This ties in with the economic outlook for developed and emerging economies. The Organisation for Economic Co-operation and Development, for example, sees economic activity in OECD countries gradually picking up, but for uneven recovery and high unemployment to persist. It predicts OECD GDP growth of 2.3% for 2011.

Contrast this with the high-growth forecast for developing economies, particularly Asia. The Asian Development Bank projects growth of about 7% in east Asian economies in 2011, compared with nearly 9% this year. Latin American, Middle Eastern and North American airlines are all forecast solid, albeit smaller, profits, in 2011. While North American carriers continue to benefit from earlier capacity cuts, those in Europe face fragile economies. Consumer confidence is low as austerity measures kick in to cut debt levels, with recession fears refusing to go away.

Although a deepening crisis in Europe will affect Asia, IATA's Pearce believes domestic demand will, in part, insulate its carriers. "The long-haul markets are significant, particularly for cargo," he says. "But I think the situation is a bit different this time. We haven't seen North America and Europe recover and the growth in Asia has been driven more by Asian domestic."

Sharp differences in consumer and business confidence translate into varying outlooks for business and leisure travel. The strong return of premium traffic on long-haul markets has also helped to drive improved profits.

Pearce points to positive business confidence and solid corporate profits. The Orbitz for Business/Business Traveller trend report shows a halving of the number of people who are feeling very or extremely obliged to save their company money when travelling. He adds: "If you look at leisure, there are vast differences in consumer confidence. That is going to make a big difference in leisure travel."

Further concerns come from fears that more taxes could pop up as countries seek to balance their books. But although new levies in Germany and Austria emerged in 2010, struggling Ireland has opted to lower its airport departure tax to bolster tourism.

And the spectre of higher fuel prices continues. IATA has raised its forecast for the 2011 oil price from $79 a barrel three months ago to $84 a barrel, and director general Giovanni Bisignani acknowledges that with the oil price now over $90, this forecast could be conservative.

Source: Flight International