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Airlines are more profitable but margins remain ‘pathetic’


Issues & Trends – December 2010/January 2011

Airlines are more profitable but margins remain ‘pathetic’

IATA has revised its 2010 airline profit predictions upwards, with new forecasts nearly 70 per cent ahead of projections made less than three months ago.

Its outlook for 2010 now predicts that the world’s airlines will make a combined net profit of $15.1 billion compared to the $8.9 billion forecast in September.

The world airline body has also boosted its projections for 2011 to a net industry profit of $9.1 billion (up from the $5.3 billion forecast in September).

But an IATA statement pointed out that carriers’ net margins remain weak at 2.7 per cent for 2010, falling to 1.5 per cent in 2011.

“Our profit projections increased for both 2010 and 2011 based on an exceptionally strong third quarter performance,” said IATA director general Giovanni Bisignani. “But despite higher profit projections, we still see the recovery pausing next year after a strong post-recession rebound.

“And the two-speed nature of the recovery is unchanged with European airlines continuing to underperform other regions.

“Margins remain pathetic. We are nowhere near covering our cost of capital. The industry is fragile and balancing on a knife edge. Any shock could stunt the recovery.”

IATA stresses that, while shifts in forecasts can appear dramatic in absolute numbers, they should be related to the size of the industry.

The $6.2 billion increase in IATA’s projection for 2010 net profit equates to just 1.1 per cent of the industry’s projected $565 billion in revenues, the association points out.

“Any increase in profits is a welcome step in the right direction,” said Bisignani. “But the fact that we can increase our profit forecast by 70 per cent and still be left with a net margin of just 2.7 per cent shows just how far this industry has to go to achieve a normal level of profitability.” said Bisignani.

2010 forecast

Major drivers for the improved 2010 forecast are:
• Passenger traffic growth of 8.9 per cent (compared to 7.7 per cent previously forecast);
• Strong passenger yield growth of 7.3 per cent (unchanged from the previous forecast);
• Revenue growth to $565 billion (an improvement of $5 billion on the previous forecast); and
• An average annual oil price in line with previously projected $79 per barrel (Brent).

“The third quarter of 2010 was exceptionally positive in terms of passenger traffic volume,” said Bisignani.

“Airlines met increased demand by utilising their fleets more intensely. Fixed costs remained constant, passenger yields firmed and the increased revenues went almost directly to the bottom line.”

 

 

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