Rising oil costs will slash global airline profits by half this year, IATA warned today. Profit forecasts for 2011 have been downgraded to $8.6 billion from the $9.1 billion it estimated in December 2010.
This represents a 46% fall in net profits compared to the $16 billion (revised from $15.1 billion) earned by the industry last year. On expected industry revenues of $594 billion, the $8.6 billion 2011 profit equates to a net profit margin of 1.4%.
IATA director general and chief executive Giovanni Bisignani said: “Political unrest in the Middle East has sent oil over $100 per barrel. That is significantly higher than the $84 per barrel that was the assumption in December.
“At the same time the global economy is now forecast to grow by 3.1% this year—a full 0.5 percentage point better than predicted just three months ago.
“But stronger revenues will provide only a partial offset to higher costs. Profits will be cut in half compared to last year and margins are a pathetic 1.4%.”
He added: “This year the industry is performing a balancing act on a very thin tight-rope of a 1.4% margin. It is a structural problem that the industry has faced with an average margin of just 0.1% over the last four decades.
“There is very little buffer for the industry to keep its balance as it absorbs shocks. Today oil is the biggest risk. If its rise stalls the global economic expansion, the outlook will deteriorate very quickly.”
IATA also reiterated its warning about the risk of increasing taxation, particularly in price sensitive leisure markets.
“This is a price sensitive business. Aviation has the power to stimulate economies. But that ability is being compromised by adding taxes at a time when we are struggling to cope with high fuel prices just to maintain anaemic margins,” said Bisignani.
European carriers are expected to make a $500 million profit this year, up from the $100 million previously forecast, but well below the $1.4 billion the region’s carriers made in 2010.
“The ongoing banking and government debt crisis are keeping domestic home markets fragile,” IATA said. “But the weak euro is continuing to provide stimulus to export industries, outbound freight and long-haul business travel which is driving the upgrading of the region’s profit forecast.
“Even so, Europe’s carriers remain the least profitable among the major regions with an EBIT margin of 1.1%.”